The Sensex closed a whopping 540 points down after finance minister P Chidambaram giving the budget; but for once, the budget exercise has truly lost its relevance in the face of the domino effect of the fall in global capital markets. There was no chance for the Sensex to escape the China effect, no matter what the FM had announced – that was evident from the slightly hysterical 650 point drop in the Sensex immediately on opening. Half that loss was recovered when the Chinese market recovered after the 9% fall. But the panic is far from over.
Investors had fairly low expectations from Chidambaram’s budget, since the panic over inflation was evident from the suspension of futures trading in several food commodities.
The carrot-and-stick experiment for excise duty on cement was a nasty surprise for large investors, who are desperately guessing that manufacturers will not reduce prices and hence their profit margins in order to fit into the lower tax bracket.
Meanwhile, investors took no chances and cement stocks tumbled. If the FM’s experiment works, it will bring down input costs for the construction industry, but if it fails, there is a good chance that he may crack the whip further before the finance bill is passed by parliament.
The cascading effect of the global indices seems little eased after the Budget
The 12.5% service tax imposed on commercial property rentals is, however, a strange blow and will again affect industry. An industrialist rightly said, in a booming economy, the two things that are in serious short supply are reasonably price commercial premises and employable people at an affordable price. Thanks to the FM the cost of rentals is up 12.5% and employee stock options, which was one way of attracting good employees, has been made less attractive. That is a strange way indeed to encourage growth.