What a year it was

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Subdued market in run-up to the budget indicates no post-budget selloff

Ahead of this year’s budget, Indian stocks are showing signs of exhaustion as if to indicate that the market expectations from the finance minister P Chidambaram are low, in fact, very low.

The bellwether Sensex is down nearly 800 points or about 4 per cent since January 25, with just four more sessions to go before the budget on February 28. On Thursday, Sensex lost 317 points to 19,325, which was the biggest single day fall in the year, before losing further on Friday.

The lacklustre market, many analysts hope, may be just what the doctor ordered as the stocks can gather steam after the budget is presented — a trend, which would be reverse of last year’s post-budget performance. In fact, Morgan Stanley’s Ridham Desai reckons that “this (a decline ahead of budget) lowers the probability of a post-budget sell-off.” “So far, the market has done nothing in the front of the budget,” he points out.

This is just the opposite of what happened before the last budget.

From January, the Sensex shot up 2,401.33 points (15.47 per cent) from 15,518 to 17,920 till the budget day on March 16. The sentiment turned bearish only after the budget by Pranab Mukherjee, the then finance minister, which was seen as “retrograde” after proposals such general anti-avoidance rules (GAAR), which aimed to target companies such as Vodafone.

The Sensex fell over 200 points on the budget day, before losing another 430 points in less than two weeks as investors voted with their feet on Mukherjee’s budget.

In contrast, the trend was bullish when 2013 began, after nearly 26 per cent gains on benchmark stock indices in 2012, on the back of bold steps by Chidambaram since mid-September. The slew of reform steps, including opening up of FDI in more sectors such as aviation and retail and cut in oil subsidies, buoyed the markets as foreign investors pumped in their second biggest portfolio investments in a year in 2012 at over $24 billion.

Adding to FII confidence was the government statements that the GAAR would be postponed at least by another two years. The FM, during his trips abroad from Frankfurt to London and Hong Kong to Singapore in January, gave enough indications that he would continue the reform steps, rein in the fiscal deficit and would present a “responsible budget”.

Later, during a trip to Mumbai earlier this month, Chidambaram also tried to boost equity market sentiment by promising to make the Rajiv Gandhi equity savings scheme more investor friendly, hinting steps to increase delivery-based equity trades, besides assuring that, among other things, he would take measures to bring back volumes in equity options segments that were now soaring in Singapore and other offshore centres, back to India.

The stock market, it seems, is ignoring all this. And a fresh up move will occur only after the budget; especially after hearing the FM’s plans to rein in fiscal deficit and steps to spur private investment.

Explains Morgan Stanley’s Chetan Ahya: “As we have been highlighting, bad growth mix — as characterised by high fiscal deficit and declining private investment spending since the credit crisis — has culminated in a stagflation-type environment. CPI inflation has stayed close to 10 per cent even as GDP growth is decelerating. In this context, we have been tracking the government’s effort to improve growth mix and productivity. Indeed, since September 2012, policy makers have moved in the right direction.”

In the budget, Ahya said, he will watch for further policy measures to improve the growth mix viz., a credible plan for cut in government expenditure growth and policy measures to encourage private investment.

Saurabh Mukherjea of Ambit Capital puts this year’s budget in proper context. “Since the FM assumed office seven months ago, he has promised to create a less ‘adversarial’ tax regime, especially from the point of view of FIIs and MNCs. For various reasons, this has not translated into improved ground-level realities for corporate India. From that perspective, this budget will be keenly watched by companies; they will want to see if the FM can walk the talk,” he writes in a note.

Ambit Capital held a conference call with its group CEO Ashok Wadhwa, and KPMG’s deputy CEO, Dinesh Kanabar. They predict a mix bag from the budget. The summary of their expectations are (a) GAAR to be pushed back by two years; (b) possibility that the government will prohibit retrospective taxation; (c) 5-10 per cent income-tax surcharge on the ‘super rich’; (d) Possibility of tax on large dividend earners; (e) imposition of commodities transaction tax; (f) possibility of a tax on gold lending; (g) indirect-tax base to be widened, by increasing all rates to 14 per cent and getting rid of all exemptions and concessions; (h) infrastructure sector tax breaks to continue; and (i) FY14 budget deficit likely to be set at 4.7 per cent.

While all these steps will be closely tracked, analysts at Nomura say since 2013 is a pre-election year, the budget projections should be taken “with a pinch of salt”. They are likely to contain some goodies for the electorate, such as the food securities bill, according to Nomura.

Though the stock market will welcome a “prudent budget”, the credibility of the budget will depend on the underlying assumptions of growth, asset sales and subsidies.


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