Day after budget: 10% tax, fiscal slip; Market wakes up rattled, slides over 800 points

Dalal Street witnessed mayhem Friday with the benchmark Sensex plunging 840 points. Worried investors dumped stocks across the board — they were also upset with the proposal of 10 per cent tax on distributed income from equity-oriented mutual funds. 

Written by George Mathew | Mumbai | Updated: February 3, 2018 1:08:42 pm
Sensex crashed 800 points after Union Budget 2018, investor wealth wiped off People are reacting to the fall in the market in front of Bombay Stock Exchange on Friday. The bloodbath wiped off Rs 458,000 crore of investor wealth as market capitalisation, or the market value of all listed shares, plummeted to Rs 148.54 lakh crore in a single day. (Express photo/Pradip Das)

A day after the Union Budget announced 10 per cent long-term capital gains tax on equities, and concerns over the fiscal slippage and macro-economic conditions unnerved investors, Dalal Street witnessed mayhem Friday with the benchmark Sensex plunging 840 points. The bloodbath wiped off Rs 458,000 crore of investor wealth as market capitalisation, or the market value of all listed shares, plummeted to Rs 148.54 lakh crore in a single day.

Worried investors dumped stocks across the board — they were also upset with the proposal of 10 per cent tax on distributed income from equity-oriented mutual funds. Investors read the projected fiscal deficit of 3.5 per cent of GDP for the current fiscal against the earlier target of 3.2 per cent and 3.3 per cent for the next fiscal and rising bond yields as deterioration in the government’s finances, raising the spectre of a spike in interest rates.

Sensex crashed 800 points after Union Budget 2018, investor wealth wiped off

The Sensex crashed 839.91 points, or 2.34 per cent, to close the day at 35,066.75 as investors cut their equity positions. The broader NSE Nifty fell below the 10,800-mark by plunging 256.30 points, or 2.33 per cent, to close at 10,760.60. Intra-day, it went to a low of 10,736.10.

Experts said fund flow to equity and mutual fund schemes is likely to come down with the 10 per cent long-term capital gains tax.

“The move (capital gains tax) surprised the Street as most participants were factoring in a change in definition of long term to two or three years from a year. The markets were overheated and a healthy correction will lead to some bit of PE (price-earning) compression,” said Devang Mehta, Head, Equity Advisory, Centrum Wealth Management.

As per returns filed for the assessment year 2017-18, capital gains from listed shares and units was around Rs 3,67,000 crore and the major part of this gain has accrued to corporate and LLPs (limited liability partnerships).

Sensex crashed 800 points after Union Budget 2018, investor wealth wiped off People react to the fall in the market near Bombay Stock Exchange on Friday. (Express Photo/Janak Rathod)

“The government thought process seems to stem from the fact that the lopsided nature of lofty income data, highlighted by the government, from long-term gains in securities creates a bias against manufacturing, thereby leading to more surpluses being invested in financial assets. This would have led the government to believe in imposing long-term capital gains tax at 10 per cent prospectively from February 1,” said Paras Bothra, President, Equity Research, Ashika Stock Broking.

Rating agencies raised concern over the slippages in deficit numbers. The market mood received further setback after Fitch Ratings raised the red flag and said the high debt burden of the government constrains India’s rating upgrade.

“From a sovereign credit perspective, a notable feature of the new Budget is that fiscal consolidation has been postponed. While the relaxation of previous medium-term deficit targets is understandable given the desire to support weak investment growth, it delays the pace of previously planned fiscal consolidation,” Fitch said.

Read | Budget 2018: Arun Jaitley brings in long-term capital gains of 10%, here’s why it’s spooked the market

The government has kicked out its steady-state 3.0 per cent fiscal deficit target further to FY21, well beyond its term. This compares to its initial medium-term fiscal plan of 2014, when it first announced to postpone the 3.0 per cent target by one year from FY17 to FY18, Fitch said.

Rating firm Crisil estimated that the government has for the second consecutive year already breached its fiscal deficit to GDP target of 3 per cent. “But the more worrisome part is that the breach in fiscal deficit is despite a cut in capital expenditure (capex). This means, had the government stuck to its targeted capital expenditure for fiscal 2018, fiscal deficit would have been still higher,” Crisil said.

Analysts who pored over the Budget fineprint Friday fretted over the deviation in fiscal path and the possibility of a rate hike by the Reserve Bank of India. After a 20 basis points spike Thursday, the 10-year benchmark bonds (old) maturing in 2017 declined by four basis points to 7.76 per cent and new bonds also declined by four basis points to 7.56 per cent.

“The market skid as deviation in fiscal path and higher rural spending dampened investor’s sentiment. Additionally, rising inflation and yield may push the RBI to be more hawkish on interest rate in the upcoming monetary policy,” said Vinod Nair, Head of Research, Geojit Financial Services.

Experts also cautioned against the rising global volatility amid withdrawal of liquidity enhancement measures by central banks. “In our opinion, global market volatility led by rising bond yields, profit booking (markets had notched one of the best monthly gains before budget) and concerns on deteriorating macro-economic conditions were the probable reasons for the market fall. We have been cautioning investors of these risks,” said Sandeep Chordia, Executive Vice-President, Kotak Securities.

Sensex crashed 800 points after Union Budget 2018, investor wealth wiped off People are reacting to the fall in the market in front of Bombay Stock Exchange on Friday. The Sensex crashed 839.91 points, or 2.34 per cent, to close the day at 35,066.75 as investors cut their equity positions. (Express Photo/Pradip Das)

Dealers also attributed Friday’s fall to the setback in Rajasthan bypoll results and the weak sentiment in the global economy and markets. For investors, important things to ponder for 2018 are going to be the rising yields in India and in the global economy which, at some point, may start hurting — if the trend continues — corporate earnings and derate price-earning multiples. Rising crude prices too will have negative ramifications for the Indian fiscal deficit.

On Friday, global markets too came under pressure. Japan’s Nikkei ended 0.90 per cent down, while Hong Kong’s Hang Seng shed 0.12 per cent. In the Eurozone, Frankfurt’s DAX 40 fell 1.33 per cent and Paris CAC fell 1.23 per cent in their early deals. London’s FTSE shed 0.29 per cent.

Meanwhile, all sectoral indices ended in the red in the domestic markets. The BSE realty index plunged 6.28 per cent, followed by infrastructure (4.03 per cent), power (3.94 per cent), capital goods (3.59 per cent), auto (3.47 per cent), consumer durables (3.37 per cent), finance (3.23 per cent), PSU (3.11 per cent) and oil & gas (3.04 per cent).

Small and mid-cap stocks faced brutal hammering as investors unloaded their positions. The small-cap index fell 4.65 per cent and mid-cap index by 4.03 per cent. These stocks had run up to sky-high levels in the last one year. The BSE Sensex had gained 1,908 points or 5.60 per cent in January 2018 and 27.9 per cent in full calendar year 2017.

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