Dalal Street sheds 293 pts and may fall further

The market believed that the Finance Minister FM would have more goodies for the corporate sector in order to push economic growth and that any 8220;biting of the bullet8221; would be restricted to government. In fact the FM has done exactly the opposite and the index has reacted accordingly.

Though a single excise duty was expected, the market is still trying to figure out the implication of the single excise on those industries in the eight per cent excise segment whose tax liability will double. The market is also yet to figure out the exact impact of the special excise on various industries. The doubling of dividend tax though not unanticipated is also expected to hit profitable companies paying high dividends. The Finance minister expects this to be passed on to investors by way of lower dividend. In the long run this may have no implication on market prices, but at present it has certainly had a bearish impact on prices.

Government expenditure and reduction in the fiscal deficit was the bullet that the Finance Minister FM was expected to bite. Instead, the fiscal deficit has moved to 5.6 per cent of GDP and his proposals to cut expenditure, are, at best dangerously vague. The big fear is that a government unable to control expenditure will lead the country into a fiscal mess which is bound to have a serious impact on a buoyant looking economy.

The reduction in food and fertiliser subsidies: Clearly the reduction in these subsidies will depend entirely on the National Democratic Alliance8217;s ability to push the proposals through parliament. More importantly, it would depend on whether Chandrababu Naidu, Om Prakash Chautala and Navin Patnaik approve of the FM8217;s proposals. Chautala and Patnaik who have become far more powerful after the recent assembly elections will not only dictate terms but are already understood to have made their discontent clear.

Disinvestment of PSU: The complete lack of clarity on the Disinvestment of Public Sector Undertakings PSUs has shocked the market. After the complete failure on this front last year, when the government failed to raise even Rs 2000 crore though disvestment, it was expected to be more specific this year. Instead, the bureaucrats in the Finance Ministry have been forced to offer assurances on all the television channels that the government is serious about disinvestment and the money raised may in fact be far higher than the sum budgeted last year. The recent bailout of the Steel Authority of India and the Industrial Finance Corporation of India with almost no strings attached has only lowered the governmentsacirc;euro;trade; credibility.

Divestment of bank shares: Yashwant Sinhaacirc;euro;trade;s announcement to reduce government holding in nationalised banks to 33 per cent without disturbing their quot;public sector characterquot; is strange. While the minister has decided to constitute a Financial Restructuring Authority FRA, it is not clear if this will make a significant difference to the health of banks. What is clear is that the FM plans to dump the remaining equity upto 67 per cent of banks riddled with bad loans on the general public. So far as one can deduce from the budget speech, it seems that the FM expects investors to pick up shares without any increase in the autonomy or accountability of government owned banks. Has the finance ministry not noticed the market prices of nationalised banks which have already gone public or those of the Industrial Finance Corporation of India IFCI and Industrial Development Bank of India IDBI? Investors often display mindless lemming like qualities, but it still seems ambitious to think that they would lap upbank shares at a decent price.

Bailout of banks: The FM has quietly slipped in a promise to bailout the three sick banks acirc;euro;ldquo; Indian Bank, United Bank of India and United Commercial Bank. He has of course said that this will depend on them submitting a restructuring proposal which meets with the approval of the finance ministry and the Reserve Bank of India RBI. Past experience shows that the ministry as well as the RBI are not likely to be very picky about the quality of the restructuring proposals. Incidentally, the increase in withholding tax on debt mutual funds seems instigated by the same nationalised banks who are worried at the outflow of deposits.

All in all, the disappointment today is only expected to spill over to the next few days and all the bullishness exuded by the foreign fund managers is unlikely to change the negative sentiment or reduce volatility until the political reception of the budget and the economic implications are clearer. Sidelights: Enamoured by the market: For as long as one can remember, ever since the budget speech began to be aired live on television, it has been customary for television channels to thrust a mike in front of the opposition party politicians trooping out of parliament and asking them for their reactions.

This year, all the newschannels have been so enamoured with the reactions of business and the stock market, that for nearly two hours after the budget one couldn8217;t get a single political reaction. It was only three hours later that the first sign of discontent in the form of Om Prakash Chautala8217;s reaction was finally aired. In fact, the next wave of market volatility will be dictated by the daily dose of political reactions and attempts to guage whether the National Democratic Allianceacirc;euro;trade;s NDA own constituents would force a roll back.

The leak: Whether or not the contents of the budget were available on an internet website, as Madhavrao Scindia alleged, one piece of information wascertainly available to every punter in the market. That the limit for Foreign Institutional Investors FIIs was being rasied from 30 per cent to 40 per cent. Market operators interpreted this as a signal that the budget would have a load of goodies for the corporate sector. Interestingly, the big punters who had dictated prices in recent times are also understood to have taken fresh speculative positions. When the full budget began to unravel these were the first to rush to the exit. At one point during the FM8217;s speech the Sensex had dropped 357 points until saniy returned and purchases in specific counters which were expected to attract FII interest saw some recovery.