Not many have questioned the Narendra Modi government’s intention to bring about a structural change in the economy and spread prosperity to the people deep and wide. But the Budget, presented recently, is unlikely to help realise the objective of reviving economic growth with investments at the fulcrum.
Finance Minister Nirmala Sitharaman has made a valiant attempt at managing many variables and still achieving the avowed objective. But the minister seems to have failed miserably in putting together the basic ‘nuts and bolts’ to change gears and run the economy on a high growth quotient.
The post-Budget market sentiment and industry analysts’ adverse reactions reflect the despondency that’s begun to roll after the Budget presentation, the first for this government in Modi’s second term.
As per conservative estimates, investors’ wealth worth about `6 lakh crore got wiped out in about four trading sessions on the stock market. While none in the government came forward to own up the responsibility for spooking the market, losses booked by investors and industry were broad-based and across counters, not leaving out even the blue chip companies. Basic economic theory suggests that market performance is a leading indicator of the way things would pan out for both investors and the people at large.
If the bloodbath in the market is any indication, the Budget package on taxes proposed by Sitharaman has been vetoed by the investors and the industry alike.
Despondency in the market may have some basis. For instance, the surcharge on income tax paid by individuals with a taxable income of `2-5 crore annually has been pegged at 3%. For those earning beyond `5 crore, the surcharge levied was a whopping 7%. High net worth individuals who would have otherwise invested in the market were hit big time. They have to now fork out about 36-42.7% of their earnings towards income tax. Knowingly or unknowingly, with this one decision, the Modi government has alienated a big chunk of the BJP’s support base amongst the high-income groups.
Over 2,000 foreign funds that operate as foreign portfolio investors (FPIs) and bring in the moolah got disrupted due to the changes made in long-term and short-term capital gains tax. They will have to now part with 36-42% of their earnings towards taxes, thus making India very uncompetitive globally. Given that FPIs have organised themselves as an association of persons (AOP) sans a proper corporate structure, their fears on higher taxes could lead to huge flight of foreign portfolio investments.
Modi government’s decision to slap 20% tax on shares buyback would only halt over 70 companies’ issues worth over `35,460 crore announced for the first six months of this fiscal. In effect, companies that distributed excess cash to shareholders through shares buyback, will have to put an end to this practice. Instead, companies will have to take recourse to dividend distribution that attracts 15% levy. What perhaps Sitharaman chose to ignore was the fact that `54,600 crore worth cash was distributed to investors through shares buyback in 2018. This also helped rally the markets.
Further, the move to increase public holding to 35% from 25% in listed entities has not gone well with managements and promoters that fear dilution in their hold. The finance ministry’s clarification that the provision was focused on state-run companies has not convinced the market makers. About 1,174 companies that are actively traded on both BSE and NSE may have to offload shares worth `3.87 lakh crore, if SEBI finally agrees to Sitharaman’s proposal. Several multinational companies, IT firms and banks will have to either offload shares or get delisted. No promoter would want to dilute stake in a company they set up and nourished.
The 2% tax deducted at source (TDS) on cash withdrawals made beyond `1 crore in a year was intended at reducing cash transactions. It was also one way of signalling companies and individuals to shift to digital payment modes. But the fear that all cash withdrawals beyond `1 crore would be subject to scrutiny by tax sleuths has unnerved investors.
Most tax proposals put forth by Sitharaman may not have been investor friendly and that explains the huge sellout on markets. There’s hardly any truth in arguments that sellout in the markets was temporary and investors would be back in hordes. There are enough indications to suggest that market may weaken further by Deepawali forcing several retail investors to do panic selling and book huge losses.
Tensions in West Asia and the dovish line pursued by the US Federal Reserve on interest rates would only hurt the valuations in India further. The Modi government seems to have lost an excellent opportunity to pep up growth, consumption demand, improve investor sentiment and create a conducive atmosphere where domestic and foreign private companies compete to get a slice of the famed India growth story.
The ultra-rightist Modi government seems to have let down its own ilk. In the process, the biggest losers were small investors who may not have easily interpreted the importance of Budget proposals. If the avowed objective was to build a $5 trillion economy by catalysing investments, then this may not be the budget that offers much hope.
K A Badarinath
Senior journalist and economic analyst based in New Delhi
Email: badarinath61@gmail.com