The Hindu Business Line : What triggered the sell-off

The Indian stock market was ravaged by a sell-off even as the Finance Minister was still reading out the Union Budget for 2009-10. The Sensex ended the day 870 points or 5.8 per cent lower; the largest Budget-day decline since 2000.

Silence on major policy reforms, increase in Minimum Alternate Tax (MAT), maintaining status quo on Securities Transaction Tax (STT), increase in budgeted fiscal and revenue deficits were some of the irritants that led to the large intra-day decline.

Not unexpected?

Though many in the market were caught unawares by the sudden slide, Monday’s decline appears justified when viewed against the backdrop of the rally that ensued after the Lok Sabha election results in the second half of May.

Sensex’ gain of 28 per cent from the pre-election level of 12,173 to the June peak of 15,600 was mainly spurred by a slew of re-rating of the earning prospects of the Indian corporate sector by large brokerage houses, both domestic and foreign.

Reports issued by major brokerage houses in the second half of May show that they had revised their outlook on Indian equities based on the assumption that the UPA Government, fortified by a strong mandate, unshackled from the influence of the Left parties, would accelerate reforms in banking, insurance and telecom, move faster on disinvestment of public sector undertakings and move towards decontrol of administered price mechanism in oil and fertilisers.

Silent on reform

The Union Budget was expected to provide a road-map for action that the UPA Government intended to take on these policy issues. The Finance Minister disappointed the market on at least two counts.

He ruled out divestment of stake in public sector banks and insurance companies and has budgeted for only Rs 1,120 crore from divestment of stakes in other Public Sector Undertakings (PSU).

Decontrol has been dismissed with a token mention about setting up an expert group for petroleum pricing. The Budget is silent on the rest of the expected policy reforms.

The Economic Survey tabled on Friday also built up expectations of the market participants regarding the provisions in the Budget. It had called for phasing out STT, rationalising dividend distribution tax, increasing foreign equity in insurance companies to 49 per cent, allowing high net worth investors living abroad to invest directly in Indian markets and so on. That none of these provisions have been included in the Budget document could also have disappointed investors.

CTT goes, STT untouched!

Abolishing Commodity Transaction Tax (CTT), the proverbial sword of Damocles hanging over the commodity trader’s neck, would be welcomed with a sigh of relief. But since this tax was never implemented, following the uproar over its imposition after the last Budget, there would be no pecuniary benefit for traders following this move.

Abolishing Fringe Benefit Tax, increase in exemption limits for personal income tax, higher allocation for infrastructure spending and NREG scheme are some of the positives in the Budget that the stock market could take cognizance of over the ensuing days.

But the greatest disappointment for the stock market was that the Finance Minister left the STT untouched.

There was a consensus that the STT would be tweaked lower to appease the trading fraternity in this Budget and there would be a road-map for phasing out this unpopular tax.

Silence on this score, coupled with increase in Minimum Alternate tax (MAT) from 10 to 15 per cent, and increase in Budget estimate of the fiscal deficit to 6.8 per cent provided the fodder for bears to rampage through the Indian stock markets after the Budget speech.

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