Every year during the run-up to theUnion Budget, the principal players in the capital markets and bourses makesuch strident demands for concessions and hand-outs from Raisina Hill thatthere is a general sense of overkill, as viewed by the average citizen. Thistime also, there was an extended wish-list from numerous quarters; thesimultaneous downward plunge in the stock market indices in the last 20trading sessions seemed to add an additional element of urgency to theentreaties.Be that as it may, Mr Sinha has managed to come up with a fiscal exercisethat appears to have largely satisfied punters on Dalal Street, Asaf AliRoad and Lyons Range, if the initial reaction of the major stock exchangesis a reliable medium-term indicator. When Mr Sinha commenced hispresentation, the Sensex and Nifty were hovering around 4150 and 1327,higher by about 80 and 32 points compared to Tuesday's closing levels. Asthe initial part of the Budget speech was being read out, the marketsmeandered downwards towards lows of 4125 and 1318. As the various policyinitiatives of North Block that directly or indirectly impact the stockmarkets came out of his briefcase, the share prices reacted positively ateach stage, before ending the day at 4247 and 1351, respectively.
Mr Sinha's first initiative that directly boosted market sentiments was thereduction in the tax on distributed profits of domestic companies from 20per cent to 10 per cent. This was a long-standing demand of the bourses andwas a plea that had logic on its side to a large extent. In fact, themarket's enthusiastic response was partly because it did not really expecthim to accept this request on this occasion. Hardened observers could hardlyforget that at least three finance ministers sat on the repeated pleas fromall analysts that India needed to tax its domestic investors at the samerate as was levied on the FIIs, who are actually non-resident taxpayers. Itwas finally left to Mr Sinha to remedy this inequity in 1999, leading to thesteady recovery and upsurge in the primary and secondary markets during thefinancial year 1999-2000, with the indices reaching almost vertiginouslevels like 5407 and 1608 for the Sensex and the Nifty respectively inJanuary 2000. Now that the government has acted on this matter, bearoperators will have one less excuse to offer when they start hammeringstocks in the future.
Another welcome move is the tax exemption of long-term capital gains derivedfrom sale of shares and units, provided the proceeds are re-invested inprimary issues made by a public company. This is manifestly an innovativeand imaginative decision and will provide a much-needed boost to themoribund primary market. This measure should also be seen against thebackdrop of the forthcoming privatisation of PSUs; logically, one cannotfault the government for adopting a fiscal regime that will assist itsofficial programme. Whether it is a peripheral move or not, the UTI andvarious MFs have also benefited from the largesse, since the tax rate on theincome distributed by them to unitholders has been brought down from 20 percent to 10 per cent.
Given the Indian penchant for things foreign, particularly if they originatefrom the western hemisphere, there was a fairly positive response to thedecision to increase the ceiling on FII investment in Indian companies underthe portfolio investment route to 49 per cent from the present level of 40per cent. There is a perception that FIIs invest only in those companiesthat have significant potential for capital appreciation and enhancement ofshareholder value. Moreover, the threshold of 49 per cent will not give theFIIs management control but will be high enough to ensure that the Indianmanagement teams are kept on their toes. The infotech sector has alsowelcomed the retrospective concession extended by the FM to venture capitalcompanies and funds (VCCs and VCFs). These entities will continue to enjoytheir tax exemption even after the undertakings in which they made theirinitial investments get listed on a recognised stock exchange. There is arecognition that a genuine entrepreneurial revolution in this country, if itever comes, will need a vibrant venture capital segment and the financeminister's belated tax bonanza to Indian VCCs and VCFs will be an additionalbuilding block in this area.
As far as specific industry concessions are concerned, the punters welcomedthe benefits given to the tea industry and automobile sectors, with scripslike Tata Tea and Telco registering smart gains. Hindustan Lever also wentup fairly substantially, though it should be emphasised that movements inindividual shares during the budget day trading session are often knee-jerkreactions or are the result of unwinding of existing positions of largeoperators.
Nevertheless, the stock exchange pundits are more or less agreed that thislatest budget of Yashwant Sinha is an exercise where he has delivered anintricately-designed package that satisfies a cross-section of hisconstituency. Obviously, he cannot please every person or even the majorityof the electorate, but dispassionate analysts feel that he has done acommendable job under difficult circumstances. There is an element ofconsistency in his effort and one should be thankful for this.
The Don Quixote factor, which few finance ministers in this part of theworld seem to be able to resist, has not eluded Mr Sinha even on thisoccasion. Promises of downsizing the government have been heard from himbefore, some as recently as in 1999, and there will be understandablescepticism from the general citizenry on this score. Another disturbingfeature is the lack of a clear policy on introducing a workable andefficient bankruptcy law; it is all very well for the capital's chatteringclasses to start gushing on television about an exit policy for labour butthere is a glaring lacuna on how to get rid of non-performing andnon-transparent management. Related to this is the question of how Indianbanks and financial institutions can recover their dues from powerfulborrowers. This country's economy can never reach true international normsunless we also address this aspect.
One trusts Mr Sinha is getting ready to begin this campaign on a warfooting.
(The author is a senior corporate analyst and a member of the Delhi StockExchange)
Copyright © 2001 Indian Express Newspapers (Bombay) Ltd.
