March 30, 2020
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The Bull Needs Love Too

Fear of losing FDI, slowing growth due to tax hikes and a less-than-credible plan to cut the deficit...

The Bull Needs Love Too

Budgets often leave markets unable to react properly; the clarity usually comes after. Not this time around. While Budget 2012 was expected to fix government finances with a reduced deficit and controlled expenditure, the markets are less than enthused with finance minister Pranab Mukherjee’s effort. The budget didn’t change much on the personal income tax front, but increased both service tax and excise duties. The two hikes, taken together, are likely to significantly hurt household spending, and thus reduce growth. Markets work substantially on sentiment and the negative feeling that a tax hike creates will keep stock prices subdued.

It doesn’t help matters that the Securities Transaction Tax for delivery transactions—brought down to 0.1 per cent from 0.125 per cent—hasn’t gone away as expected. On specific sectors, cigarette stocks like ITC and VST Industries should benefit in the near term, even though excise duty went up 5 per cent. More was expected since cigarettes are an easy target for duty hikes, and they were left alone last year. Auto sales are likely to be hurt. The M&M stock rose 3.4 per cent on budget day, and the auto space outperformed, on the news that there was no change in tax on diesel vehicles. But that ignores the duty hike on large vehicles to 27 per cent. Small cars will see a duty hike of 2 per cent.

Then, Cairn Energy and ONGC will be hurt by the increase in cess on crude oil produced in India. Power plants have got a reprieve as the expected rise in import duty for power equipment didn’t materialise. BHEL, for one, will suffer competition from Chinese power equipment producers. Power producers, though, can now borrow abroad for less as withholding tax on interest paid was cut, and tax-free status for new plants was extended by another year. Despite this, however, the shares of most power companies fell between 1 and 2 per cent.

It was later reported that the tax rules have been changed to retrospectively tax Vodafone’s purchase of Hutchison’s India assets—a transaction on which the Supreme Court has given Vodafone a clean chit. Introducing a change that taxes past transactions seems to have spooked foreign investors. Finally, the FM’s proposal to bring down the deficit to 5.1 per cent from an estimated 5.9 per cent this year found few takers. The government expects total revenues to rise 22 per cent; at best, the tax proposals will bring about an increase of about 4 per cent, so the growth must assume a rapid increase in corporate profits, the taxpayer base or taxable transactions. These look unlikely, especially at a time when growth in Europe, Japan, China and Brazil seems sluggish. With the fear of losing FDI, slowing growth due to tax hikes and a less-than-credible plan to cut the deficit, the outlook remains negative for stocks.

Deepak Shenoy is a market analyst and educator at

E-mail your columnist: deepakshenoy AT

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