Reflecting investor disappointment, Sensex tanks 988 points

Lokeshwarri SK, BL Research Bureau | Updated on February 01, 2020

Black Saturday: Stock brokers were seen watching avidly the Finance Minister Nirmala Sitharaman's budget speech on Saturday, February 1, 2020. - Paul Noronha

Disincentive to save in ELSS and ULIPs, fiscal slippage, leave investors unhappy

The Sensex tanked 988 points and the Nifty 50 was down 300 points on Saturday, showing that investors are clearly not happy with the Budget announcements. While Finance Minister Nirmala Sitharaman did give a detailed outline of measures to address the problems in the agri, banking, MSME, rural, infrastructure and social sectors, there were no measures that ensured a boost to growth.

It could be said that the cut in income-tax slabs would boost consumption, but the removal of all exemptions and deductions means that inflows into mutual fund ELSS schemes and ULIPs could be impacted, as these inflows are linked to 80C deductions.

Slip in fiscal deficit

Foreign portfolio investors (FPIs) closely monitoring the fiscal deficit number would have been disappointed with the slip in the fiscal deficit for FY20 and FY21. It may be recalled that last November, rating agency Moody’s had changed the outlook on India’s economy to ‘Negative’ from ‘Stable’ citing the slowing growth leading to higher debt burden as a reason.

The rating agency had said that if growth continues to slow it would indicate a failure on part of the government to implement effective economic policies. IMF Chief Gita Gopinath had also said recently in her blog that the recovery in global growth for 2020 remains highly uncertain as it relies on improved growth outcomes for developing economies such as India. These investors would have been disappointed at the slippage in fiscal deficit.

Also, it needs to be remembered that the Sensex and the Nifty had been hitting new life-time peaks even as corporate profits were slowing and the economy was skidding.

The market was also expecting rationalisation in the securities transaction tax cash, futures and options transactions. The tax incidence on option traders is the lowest, making traders throng this segment. Besides this, the rate of STT of 0.1 per cent on both purchase and sale transactions in the cash segment is too high and can be calibrated. Retaining the STT, once long-term capital gains tax was reintroduced on equity and equity mutual funds in 2018, is not entirely justified. But the Budget did not make any moves towards this facet.

Incentives for bond markets

There were a few incentives announced to draw more money into the bond markets, such as allowing sovereign wealth funds 100 per cent tax exemptions on interest, dividend and capital gains in investment made in infrastructure and other specified sectors before March 31, 2024 with a lock-in period of three years.

Concessional withholding tax of 5 per cent under section 194LC was also allowed for interest payment to NRIs for money borrowed or on bonds issues up to June 30, 2023. FPIs and qualified foreign investors have also been given this leeway on investments in corporate bonds and government securities. This concession is also extended to investments in municipal bonds.

International bullion exchange

The International Financial Centre in the GIFT City of Gujarat has found a couple of mentions. The FM has proposed to set up an international bullion exchange in the GIFT IFSC. This is likely to help Indian corporates hedge their positions in India. Also, India being the largest consumers of gold after China, it would be a good idea to have a captive platform for discovering gold prices. The Finance Minister has also announced lower withholding tax from 5 per cent to 4 per cent on bonds listed on the GIFT’s IFSC platform.

But these measures have not been enough to placate equity investors

Published on February 01, 2020

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