Govt's last chance to do the right things, feel stock markets
Abhijit Joshi in Bombay
The countdown for the Bharatiya Janata Party-led coalition's first Budget has begun. Yet the Indian stock markets are not gung ho about
it.
Despite all the bullishness the markets have shown since the
BJP government came to power, they have little hope of getting
any direct market-friendly sops.
Perhaps Finance Minister Yashwant Sinha's warning about the 'tough times' that lay in store for the country and the tougher fallout of the five nuclear tests done at Pokhran are to blame.
The stock markets are, however, pinning their hopes on the incentives that are likely to be offered to the Indian industry which will ultimately help revive the markets.
This is perhaps why the pre-Budget charters of Indian brokers,
institutions and foreign institutional investors have focused
more on benefits for the economy rather than individual interests.
''We now need to focus on the economy. Only then can we be at an advantage,'' says K R Bharat, director, Credit Sussie First Boston.
Thus the market is hoping that there will be a significant opening
of the infrastructure sector and the insurance sector with 25 per cent foreign equity being allowed.
The stock markets also want the real estate sector to be given industry status.
As for fiscal deficit, they feel the government should bring down its expenditure while increasing the revenue.
Besides, they seek other direct market boosters like reducing capital gains tax for Indians to 10 per cent from the current 20 per cent and exempting capital gains tax on money reinvested in the shares of manufacturing companies.
''These measures would bring the Indian investor at par with the foreign institutional investors who pay only 10 per cent on long-term capital gains tax, thus attracting more small investors to the market,'' believes
J C Parekh, president, Bombay Stock Exchange.
Interestingly, some foreign institutional investors have asked for removal of all capital gains tax barriers. At present, such inflows are considered individual investments and are subjected to 30 per cent tax on short-term capital gains and 10 per cent on long-term capital
gains. The FIIs want the government to consider them as pooled investments like the mutual funds, keeping them outside the tax bracket.
As U R Bhat, director, chief investment officer, Jardine Fleming,
argues, ''Even when the Securities and Exchange Board of India
considers our application for approvals, it takes into account
the number of investment partners. So why can't
it be treated as pooled investment instead of individual investments?''
Market bigwigs like Dina Mehta, director, Bombay Stock Exchange,
have also made a case for disinvesting shares of public sector units. They feel that the Indian public should be given discounts in this regard.
According to her, the government, which is in desperate need to
disinvest Rs 50 billion worth PSU shares, should seriously consider Indian investors as ''it is the public money which will go back to the public. These measures will undoubtedly mean return of the investor to the markets. For, these a measures could be likened to the period when the government asked the multinational companies to dilute their shares and the Indian investors lapped up the offer.''
Buy-back of shares would also allow cash-rich companies to buy their shares from the market which they believe are undervalued.
This would lead to a shortage of the company's floating stock thus resulting in its share price moving up. Besides it will also help in letting investors and shareholders know how serious the promoters are about the prospects of the company.
Already companies like Reliance Industries Limited, Bajaj Auto Limited, Proctor and Gamble Limited, Videocon International Limited and Jindal Strips Limited have made buy-back provisions a part of their floating equity.
But will the government be able to deliver all this?
Despite the market's pessimism, it believes that, if the government has to make the right decisions, it has to be now. After all, the country's
dismal economic outlook, downgrading by international rating agencies and fear of more stringent sanctions has its upside too.
''This is a great opportunity. I believe that India can really
put up a fight only for another six months,'' says Bharat.
Others feel that the Budget will echo the need to prove India's grit.
Thus the market is counting on sops for the infrastructure sector with a rise in the customs duty by 5 to 10 per cent which will be good for the Indian industry.
The FIIs too concede that, though the government may not
offer any fresh incentives for increasing foreign inflows into the market, it will try to retain their confidence.
After all, the FIIs have been selling more than what they have been buying in the market since November last. Till May 22 this year, the FIIs have withdrawn about Rs 6.12 billion.
One reasoning as to why the market is not expecting any grand
announcements is because there is not much left to be done.
As one broker put it, ''What could the BJP government announce
now that has not already been discussed by the erstwhile United Front
government? One cannot even ask for sops like tax cuts for the
general public as they are already at their lowest.''
In fact, even the issue of buy-back that the market has been demanding is anyway on the anvil. The last finance minister, P Chidambaram, who had mooted the idea, was willing to effect a change in the Companies Act. ''The BJP government could take it further by giving high priority to the Companies Act amendment bill,'' he says.
''It is only a matter of timing,'' say brokers who expect it to be announced during the Budget session.
Despite all the optimism, the fact remains that the markets have been falling since the nuclear blasts. This was why there has been no
pre-Budget rally this year.
Will the market have a post-Budget rally? ''There will probably be a rise of 100 to 150 points but the 300-to-400-points rise is definitely out this year,'' says Dina Mehta.
Bhat feels it will all depend on what the Budget brings out.
But almost all agree that, since Prime Minister Atal Bihari Vajpayee and Finance Minister Yashwant Sinha have been hammering the fear of a tough budget, even a slight relaxation will make the market happy, giving a boost to the bourses's sentiments.
So the question -- will the Budget see a reversal of fortunes
for the stock markets? -- brings forth mixed feelings of pessimism
and pragmatism.
Marketmen know there is not much to hope for and yet they are hoping the government will do all the right things. In the current economic scenario, this might well be the government's last chance to do so.
Budget '98
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