Double whammy for Dalal Street

The market echoed the angry response from India Inc. The differential excise levy on the cement sector and the hike in dividend distribution tax didn’t go well with India Inc and the market. So was the extension of minimum alternate tax to infotech companies. However, many analysts, fund managers and corporate honchos said the market reacted in a knee-jerk fashion, ignoring the long-term impact of the Budget.

Said Hemendra Kothari, Chairman, DSP Merrill Lynch: “The Finance Minister has sought to keep a thrust on growth through enhanced outlay in infrastructure while ensuring a fiscal prudence which will continue to sustain growth over the medium term. While markets may have reacted adversely today on the back on falling global markets, I continue to believe that the India story continues to remain strong.”

Others agree. “The market has not seen the entire range of the thought process behind this budget in focusing on some narrow tax provisions. This budget is a long term policy direction setter for a larger schema of a sustained long term Indian economic growth story,” said Ajay Bagga, CEO Lotus India Asset Management.

Kothari said allowing short-selling by Institutional Investors would enable in broadening the capital markets. Additionally, setting up of SROs (self-regulatory organisations) will bring in increased transparency and will align Indian capital market with the global markets. However, Kothari, Nimesh Kampani of JM Financial and Uday Kotak of Kotak Mahindra admit that the proposed increase in the dividend tax has been a dampener, though it will not have much of an impact in the medium to long term, as the market is driven more by fundamentals.

The market and India Inc were further disappointed that there was no change in the corporate tax. Cement and infotech companies led the downtrend on the market with large cap IT shares plummeting by up to 10 per cent. Auto shares, led by Maruti, also fell as the expected excise cut didn’t materialise. However, ITC swam against the tide and posted gains despite a hike in excise duty. Reason: cigarettes were not brought under VAT.

Investors were preparing for a slump even before the markets opened for trading. Markets across the globe were reeling under selling pressure following the 8.8 per cent crash in Chinese market on Tuesday that eraed about $140 billion of value in China’s biggest fall for a decade. Nasdaq and Dow Jones also fell steeply on Tuesday, sending ADR prices of Indian companies crashing by up to 7 per cent. Hong Kong’s Hang Seng Index was down 2.26%, while Japan’s Nikkei 225 Index slipped 2.85 per cent.

The market had a bumpy ride to the day of the Budget. Several factors like lack of inflows at higher levels, high valuations, inflation and rising interest rates, fears of an earnings slowdown in coming quarters and profit taking at higher levels have been haunting the market of late.