India’s stock markets are in the throes of a bear hug.
The National Stock Exchange’s (NSE) Nifty 50 index has shed nearly 11% of its value since July 5, when finance minister Nirmala Sitharaman announced a slew of proposals, particularly tax surcharges that put off foreign portfolio investors (FPIs), in her maiden union budget.
Besides, the budget lacked any major stimulus package to lift sagging economic growth, setting off a stock market slide.
The equity deluge, over the last six weeks, has wiped out roughly Rs13.4 lakh crore ($190 billion) of investor wealth on NSE, as the bourse’s total market capitalisation fell from Rs151.46 lakh crore in early July to Rs138.05 lakh crore on Aug. 14.
Only a few months earlier, investors were anticipating that the markets would scale new peaks if Narendra Modi’s Bharatiya Janata Party (BJP) returned to power.
While the election results, on May 23, did catapult the Nifty 50 to new highs, the rally was largely restricted to the bluechip stocks, or the big companies that comprise the index. Stocks in the mid- and small-cap segment, which constitute the biggest share of most investors’ portfolios, remained sluggish, or even declined.
Investors in these smaller companies were then awaiting cues from the budget for a reprieve. But it only added to the negative sentiment.
The Modi government’s move to contain fiscal deficit, or the difference between revenue and expenditure, gave Sitharaman little scope for fiscal maneuvering. Instead, there was an attempt to mop up more income tax revenues.
The move to levy higher surcharges on individuals earning over Rs2 crore and Rs5 crore annually, hit around 40% of FPIs. By the second week of August, they had pulled out over Rs20,000 crore from Indian equities. Mid- and small-cap indexes bore the brunt of the capital flight, falling by 30% and 45% respectively from their record peaks clocked in 2018.
The budget also imposed an additional 20% tax on share buybacks by listed companies, which was not received well by equity investors. A buyback is essentially a scheme where a company purchases a certain amount of its own shares from shareholders to incentivise them. Share buybacks are popular among India’s major IT companies. It is feared that the additional tax burden may now force many listed companies to withdraw their buyback plans.
Meanwhile, the budget proposal to raise the minimum public shareholding limit in listed companies from 25% to 35%, left investors staring at the possibility of a liquidity squeeze.
These negative cues from the budget had a cascading effect on market sentiment, already dampened by weak micro- and macro-economic signals.
Corporate India’s June quarter earnings showed a visible downtrend in net profits, with auto and auto ancillary companies among the worst performers. IT companies, which form a major chunk of overall corporate earnings, also missed earnings estimate.
Macroeconomic indicators have also been deteriorating due to poor consumer sentiment in India.
India’s GDP estimates for the ongoing financial year has been lowered, domestic savings have fallen, private capex remains dormant, and exports are sluggish. Besides, banks have been passing on only a miniscule portion of the several rate cuts announced by the Reserve Bank of India (RBI). The crisis among non-banking finance companies (NBFC) has also led to a liquidity crunch.
Given the micro- and macro-variables, and the lack of adequate budgetary support for the economy, most equity investors are in exit mode.
The present downtrend may be prolonged as it looks more structural, and less cyclical. Structural reforms, if any, need time to percolate into the economy’s veins before any results are visible.
But market sentiment, which is equally important, may improve sooner, if the reforms hit the right vein.
Relaxation of the super-rich tax has been the most audible demand so far, but the government would do well to look beyond this.
For instance, the automobile sector, which has seen the most visible fallout of the slowdown, will benefit if the goods and services tax (GST) on vehicles is slashed from 28% to 18%, in accordance with the industry’s demands. NBFCs, whose loans are critical to auto sales in rural areas, also need to be strengthened.
At the core, however, remains India’s troubled banking sector whose ability to leverage growth has been limited by a pile of non-performing assets (NPAs). Banks require more capitalisation from the government so that they can be active participants in facilitating growth.
Additionally, the government must take measures to encourage and increase household savings.
These measures entail additional government expenditure, or trimming tax receipts, and will, therefore, be at loggerheads with fiscal deficit targets. Yet, it must bite the bullet and revive the animal spirits of the economy, before it’s too late.
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