Many Positive Proposals, But There's A Sting In The Tail (1 March 2003)
Since Jaswant Singh likes to do things differently, he is probably pleased that that the capital market was completely confused by his first Budget.
On the face of it, investors, industrialists and market watchers can’t find much fault with Singh’s first Budget. They are happy that he has not gone overboard on populist policies and has indeed presented a growth-oriented budget, geared to take advantage of low interest rates, and has rationalised taxation, given an impetus to infrastructure development and will encourage agriculture to move up the value chain. In fact, but for minor cribs and peeves associated with specific bets in individual stock or industry sectors, the Budget has won high approval ratings.
Yet, neither investors nor speculators were putting down new money on stocks and the rise in stock indices was lukewarm, out of sync with the bouquets that the FM has collected. That is because investors are worried about the devil in the budget details. Here is how the benchmark indices closed budget day trading: the Sensex rose 6.32 points to close at 3283.66 and the Nifty was up 10.45 points (to 1063.40) mainly due to a closing rally in software stocks.
The derivatives market too remained uncertain. Although the NSE logged an all-time high turnover of Rs 4,100 crore in the derivatives segment, price trends were almost identical to those in the cash market. Stocks such as State Bank of India, Bharat Heavy Electricals Ltd and Shipping Corporation of India lost ground as speculators unwound previously built-up speculative positions.
At the same time, information technology stocks, especially Infosys and Wipro, rose sharply since the FM spared them from higher taxes, and eased the way for mergers and acquisitions.
Part of the reason for investors’ uncertainty is that although Jaswant Singh has delivered on most pre-budget expectations, all of them come with a catch. The capital gains tax benefit only applies for just one year, and that too next year; so investors wonder if there is, in fact, any capital gains benefit at all, until the FM clarifies how this would work. The scrapping of dividend tax in the hands of recipients has been welcomed, but the liability has merely been passed on to companies. Similarly, investors have still to work out the implications of the increase in service tax to various industries.
The most confusing aspect of Jaswant Singh’s Budget is his attitude to the public sector. Despite his many forward-looking pronouncements, he kept slipping into the closed-economy mode while dealing with public sector institutions. For instance, the decision to announce policies on behalf of General Insurance Corporation (GIC) and Life Insurance Corporation (LIC) in a liberalised economy is downright shocking. Both institutions operate in a highly competitive market and should be free to make their own decisions. Instead, the FM announced an Insurance Pension Scheme (Varishta Pension Bima Yojana) for LIC, offering a high 9 per cent return to citizens of age 55 and above. The return is higher than on Reserve Bank bonds and the finance minister has generously offered to make good any shortfall through the exchequer. Obviously, the finance ministry has learnt no lessons from the Rs 18,000 crore payout to unit holders of Unit Trust of India.
Although mutual funds are now barred from floating assured return schemes, the FM has personally announced an assured return scheme with an explicit bail-out guarantee out of taxpayers’ money. Similarly, GIC has been asked to float a health insurance scheme with vague populist intentions and undisclosed viability.
Even in the case of private banks, although the FM has raised the Foreign Direct Investment ceiling to 74 per cent and removed the 10 per cent cap on voting rights, bankers are disappointed that private sector banks will be asked to set up rural branches for farm loans.
The confidence about public sector disinvestment is equally perplexing. The disinvestment target was missed by a massive Rs 9,000 crore this year, but the FM confidently expects to realise Rs 13,000 crore by selling public sector companies next year.
It is such details about Singh’s Budget that has made the market nervous and so they are unwilling to cheer his extremely positive statements and many concessions until they have analysed the details. But that shouldn’t worry Singh. He has correctly said (to a television network) that he would have been more worried if the stock market had reacted in a mercurial manner. And given the fate of two previous dream budgets — P. Chidmabaram’s in 1997 and Yashwant Sinha’s in 2000 — one tends to agree with him. However, since Singh has promised to restore investor confidence, the next few days should see him explaining the fine print of his proposals and taking note of investors many concerns -- Sucheta Dalal