In his first television interview to Doordarshan, Finance MinisterYashwant Sinha tried hard to keep a poker face and appear nonchalant whentold that his budget had been warmly welcomed by industry and that thecapital market indices had all shot up. But surely it was a reaction that MrSinha had anticipated. The budget has indeed surpassed all expectations, butthe reaction to it was also cleverly engineered.For several weeks the finance minister (FM) has been warning industrialistsand investors to prepare for a tough budget and effectively talked down themarket. This was promptly interpreted to mean a tough dose of taxation. MrSinha's little act of drinking a glass of water and mopping his brow("Pasina chhut gaya") before announcing his taxation measures was part ofthe same build-up.
The market reacted to his expectation. The Bombay Stock Exchange sensitiveindex shot up almost 180 points. If it did not achieve the 300-point rallypredicted by Rahul Bajaj it is because the market realises that cogentarticulation of policy and future direction with respect to infrastructureand labour reform has to make it through the two houses of Parliament beforeit translates into reality.
The market was buoyant for the following reasons: First, because Mr Sinha'sbudget contains no serious tax blows. Instead, the elimination of thesurcharge on corporate tax, barring the Gujarat earthquake one, was a majorrelief. Even more welcome was his decision to leave the software sectoralone and prevent a further slide in these scrips. Thirdly, increasedcapital account convertibility, enhancing the FII portfolio investment limitto 49 per cent and two-way fungibility of ADR/GDR issues will boostinvestment. Fourthly, the service tax dragnet was not cast as wide asfeared; and customs and excise duties were in line with the direction setout by earlier budgets.
Further, there were plenty of positive policy signals concerninginfrastructure development, repeal of the Sick Industrial Companies Act,changes in labour and retrenchment and foreclosure laws, the increase indebt recovery tribunals and increased independence for bank managements.
However, the market recognises that these are tough decisions, which dependon the cooperation of other political parties.
The abolition of the banking services recruitment boards, reduction inthe finance ministry's own discretionary powers and the decision to downsizehis own ministry are seen as indicators that the FM means business. MrSinha is at his weakest with regard to specific policy measures for thecapital market development. For the first time, the budget does not even paylip service to investor protection. It also seem naive to expect that theInitial Public Offering (IPO) market would revive due to long-term capitalgains exemptions. The IPO market would revive if investor confidence incompanies and the pricing of issues is restored.
Also, the decision to remove the requirement of compulsory domestic listingof foreign companies who bring in $50 million is bad news for investorssince it would reduce good investment opportunities. It would also havehelped if the FM had made a push to revive the Investor Education andProtection Fund which has been set up under the amended Companies Act andremains in a limbo because of obstructions from his own ministry. Themeasures for developing a government securities market and an active debtmarket are badly needed, very precisely articulated and have specificdeadline; but the issue of regulatory jurisdiction has been left untouched,as also the differing perspectives of the two regulatory agencies. Whetherthe deadlines would be met and the budget proposals materialise will dependon a committee comprising the Reserve Bank of India, Sebi, the stockexchanges and the Ministry of Finance. This committee is to be charged withgetting the debt market activated next year. It is more likely that the FMwould have to step in and spell out specific jurisdiction of the tworegulators - Sebi and the RBI, before the committee can work on thenitty-gritty.
Fortunately for the FM, interest rate volatility has already activatedthe debt market and pushed up trading volumes. On the National StockExchange, debt volumes have risen from levels of Rs 300 crore a day a fewmonths ago to Rs 3,000 crore per day. The number of transactions has alsojumped from 20 to 400. There may be some devils in the detail, but overall,Mr Yashwant Sinha's budget seems on a par with Dr Manmohan Singh's firstbudget and P Chidambaram's dream budget.
It remains to be seen whether Yashwant Sinha's skilfully-createdafter-market remains as buoyant in weeks following the budget. It may wellbe that the fillip to market sentiment and increased flow of funds intoequity will keep the indices buoyant, but a lot more would depend on whetherthe opposition parties allow him to implement his policies.
Copyright © 2001 Indian Express Newspapers (Bombay) Ltd.
