Markets dive but why this could be an over-reaction

And still, to see market participants blame Finance Minister P. Chidambaram’s fourth budget under the UPA administration for the 541 point (4 per cent) fall in the Sensex to under 13,000, seems an overreaction that will get corrected sooner rather than later. And if it doesn’t, smart investors should use it as an opportunity to buy into the India growth story.

(They must also know that the fall is in tune with a global crash – Philippines fell by 7.9 per cent, Brazil by 6.6 per cent, Mexico by 5.8 per cent, Nasdaq by 3.9 per cent, Japan by 2.3 per cent and South Korea by 2.6 per cent. China, which triggered the crash contagion yesterday, turned around, rising almost 4 per cent.)

The Sensex too will turn. For, beyond the speech time and money being budgeted for agriculture and other social schemes — Bharat Nirman, Sarva Shiksha Abhiyan, National Rural Health Mission, and of course, the big one, National Rural Employment Guarantee Scheme — this budget, has its focus tight on inflation control, as Chidambaram tries to balance high growth (through increased outlay for infrastructure) focus with low inflation.

Inflation seems to be sitting in the driver’s seat in this budget. So, while the customs and excise cuts should reduce prices somewhat, this could alter the competitive scenario and the price could be growth – smaller firms will face greater risk, as they get exposed to global competition, for which they may not be ready just yet. In that respect, the budget could be growth negative.

For individuals, the threshold limit of exemption in case of all assessees being raised by Rs 10,000 should be seen more as a ‘feel good’ reward “in view of the cooperation they (assessees) have extended to the department of revenue” than any serious gain. So, let’s continue to celebrate the general rise in prosperity over the past three years, and see the annual Rs 1,000 saving that Chidambaram has doled out as tokenism.

What’s more interesting and useful are the process changes. The debate over multiple cards, at least while investing in securities, just got over. As reported in The Indian Express, the humble PAN will now be the sole identification number for all participants in the securities market with an alpha-numeric prefix or suffix to distinguish a particular kind of account. This puts to rest the pointless and cumbersome processes that needlessly earned Chidambaram a bad name among small investors, particularly senior citizens.

Regulating financial intermediaries, an idea that this newspaper has been highly vocal about, moves ahead under the SRO (self regulating organisations) structure. Participants will form a self-regulating body, Sebi will put its representatives on it and if needed, an enabling law will follow. This is good news for victims of mis-selling and should bring in the much needed transparency and accountability that the last mile in a highly developed financial sector sadly lacks.

While India remains the growth story, those who would like an exposure to lower priced Vietnam, Russia, Mexico, Turkey or even the US, will now be able to do so through mutual funds. Chidambaram proposes to “converge the different regulations that allow individuals and Indian mutual funds to invest in overseas securities by permitting individuals to invest through Indian mutual funds”.

While on funds, doubling DDT to 25 per cent for money market and liquid funds will, at current rates, make fixed deposits more attractive and money will move from funds to banks. But these funds are largely used by companies and institutional investors which comprise a large chunk of assets managed by asset management companies, which could see a fall in their AUMs. Increasing it from 12.5 per cent to 15 per cent for companies declaring dividends will add a little pressure on their profit and loss statements.

Turning Mumbai into a regional financial centre delivers a lot of pride, but unless the rupee turns fully convertible, what strategic advantage would this strained city have over say Hong Kong and Singapore in the East and Dubai in the west? Sure, India’s size and regulatory governance would add weight, but unless money can freely flow in and out of India 24/7, howsoever revolutionary and far-reaching the high powered expert committee’s report may be, it is unlikely to convert the city into a regional financial centre.

It’s fine for the government to take credit for delivering high economic growth, when growth is a global phenomenon and India’s competitive advantage and smart policies give a greater leverage to companies to explore and compete globally. But to blame the same global economy and say that prices in India are up because they’ve risen internationally is looking at the other side of the same economic coin. And that’s the high-growth-low-inflation toss.

Sure, it’s not easy to manage high economic growth with low inflation, particularly now when noises about the aam aadmi not understanding GDP growth and worrying more about inflation are reaching an electoral crescendo. But in a bid to smother inflation, let us not asphyxiate growth. An idea Chidambaram needs to sell to his colleagues — and the electorate.