July was market mayhem at its worst. By the end of trading day on Tuesday, the second last day of the month, the Nifty Index had slumped to 11,085, losing 603 points or 5.2 per cent in just nine sessions. This was the lowest level of the stock market in the last five months. The sharp erosion has been triggered by a massive sell-off by Foreign Portfolio Investors (FPIs), who have pulled out more than Rs 11,000 crore last month on worries about the new, inhospitable tax surcharges and a slowing economy.
India’s loss has been the gain of Thailand, Indonesia, South Korea and Japan, as these countries have seen July inflows ranging from USD 400 million to USD 1.7 billion. This mood is in sharp contrast to the run-up to general elections and after, where the Modi government winning a second term saw the same FPIs pumping in over Rs 60,000 crore into the Indian capital markets in the March-May period.
Budget shockers
The strong India bet was born from an expectation of a high growth, strong economic stimulus by investors. Unfortunately, Nirmala Sitharaman’s maiden budget proved to a shocker. The Robin Hood tax on the super-rich – 3 per cent rise for those earning between Rs 2 and 5 crore a year and 7 per cent rise for those with incomes above Rs 5 crore - has taken the highest income tax slab to 42.7 per cent, provoking sniggers about the return of Nehruvian socialism.
As the realisation has sunk in that the high individual tax rates are applicable to trusts and Association of Persons (AoPs) as well, these foreign investors began withdrawing to look for greener pastures. As many as 40 per cent of the over 9,000 FPIs are registered in India as trusts or AoPs to side-step cumbersome disclosure rules.
The Budget also imposed a 20 per cent tax on share buybacks by listed companies and increased minimum public shareholding to 35 per cent from the earlier 25 per cent. All this has been perceived as interfering with the flexibility of promoters to devise their ownership norms.
In her reply to the flak she faced, Finance Minister Nirmala Sitharaman said only 5,000 super-rich individuals were hit by the highest IT slabs; and as many as 8-10 other countries too have higher 40-50 per cent slabs for the rich. However, the market is not impressed. Many have pointed out that Scandinavian countries like Belgium and others like Germany, who have high tax regimes, also have sophisticated welfare programmes to which this tax money is directly routed. India doesn’t.
Slowdown blues
There was expectation that following representations by industry federations and foreign investors to PMO, some elements of the tax surcharge would be rolled back. However, the government was unmoved; once that became clear, the market meltdown has gathered pace. Another fear of those pulling out money from India is the sputtering economy. A slowdown has gripped business activity on flagging demand and poor consumer sentiment; and there seems to be no end in sight.
The latest data released by the commerce and industry ministry shows growth in eight key sectors slowing to a miserable 0.2 per cent in June, as compared to 7.8 per cent growth in June 2018 and 4.3 per cent for the immediate previous month of May. These sectors include coal production, crude oil, natural gas, fertiliser, steel, cement and electricity.
These core sector segments account for 40 per cent of the index of industrial production, and reflect the withdrawal of consumers from downstream industries such as automobiles (passenger car production was down nearly 36 per cent in July) and housing.
Besides the perceptible problems of tax surcharge and an economic slowdown, there are other nagging issues dragging down business sentiment. The lack of a level playing field is a constant refrain. The telecom companies say rules are being tweaked to boost Reliance Jio. In retail, the complainants are Walmart and Amazon, who say Reliance is being favoured.
Quality and merit is at the receiving end. Andhra Pradesh Chief Minister Jagan Mohan Reddy has announced a reservation of 75 per cent of jobs in infrastructure industries for locals. Madhya Pradesh Chief Minister Kamal Nath too has a 70 per cent job reservation in the private sector for the sons of soil. There is a limit to what companies can be forced to crimp and cringe. Growth does not come from pious declarations. An efficient financial and regulatory system has to be in place. In the near term, it is not in sight.
Take, take, but give as well
The finance minister points out that 8-10 other countries too have 40-50% higher tax slabs for the rich, but the markets aren’t impressed. Many point out that Scandinavian countries like Belgium and others like Germany, who have high tax regimes, also have sophisticated welfare programmes to which this tax money is directly routed. India doesn’t.