Markets looking at performance, not proposals

Will the markets take off now? Unlikely. Finance Minister Jaswant Singh was liberal for the markets this time. But going by the response of ...

Will the markets take off now? Unlikely. Finance Minister Jaswant Singh was liberal for the markets this time. But going by the response of Dalal Street to the Budget on Friday8212;when the Sensex made only a 6-point gain8212;it seems the market is showing a disinterest.

Jaswant fulfilled most of the wishes of punters. Dividend tax has been removed, long-term capital gains tax has been abolished and equity schemes of mutual funds have been exempt from dividend distribution tax for one year. On the other hand, the market will also benefit from the reduction in corporate tax and reduction in duty on vehicles and white goods.

Tax breaks to the salaried class are also goods news for the market. A portion of any surplus funds will find its way into the market. He also announced several steps to take the reform process forward. Then why is the market cautious and hesitant this year? There may be two reasons.

On the face of it, it appears the market has got several benefits. But in reality it is not so. 8220;We were expecting a cut in the corporate tax rates which has not happened and only a minor cut in surcharge has been effected. However, corporates would stand to lose because of the 12.5 per cent dividend withholding tax,8221; said C. Parthasarathy, chairman, Karvy Consultants.

Long term capital gains have been exempted from tax but only on listed equities. Again this applies only to equities purchased after April 1, 2003. The dividend tax has abolished in the hands of the investors for equities and mutual funds. However, this will be replaced by a withholding tax of 12.5 per cent on the company/mutual fund that distributes dividends. 8220;We expect the lower interest rate environment to benefit equities as well as corporate earnings. The equity markets are ultimately dependent on growth in the economy and corporate earnings,8221; says Hemendra Kothari, chairman of DSP Merrill Lynch Ltd.

Secondly, according to a top stock broker, the market is slowly coming out of the hype surrounding the Budget and getting modernised. 8220;Markets have changed. We saw many market reforms in the last three years. Apart from introducing online trading, badla has been abolished and rolling settlement and demat trading have been introduced. It8217;s not possible to indulge in excessive speculation now,8221; he said.

When Yashwant Sinha unveiled his 8216;dream8217; Budget in 2001, Sensex rose by around 170 points on the Budget day. However, it crashed by the same margin on the very next day. The surfacing of the scam and the market manipulation which came to light later only added to the market woes.

Story continues below this ad

Sensex had touched the all-time peak of 6,150 in February 2001. It has never seen those levels again. In fact, Sensex has been stuck in the 3200-3350 range for quite some time. 8220;There was no major pre-budget speculation this year. We need to wait and see whether the Finance Minister succeeds in implementing his Budget proposals. The market is looking at long-term developments on the economic front. If the economy looks up further, stock markets will boom,8221; says stock dealer Pawan Dharnidharka.

The equity market has been in the doldrums in the last one year. Ditto is the case with the primary market. There has been hardly any IPO initial public offering in the last two years 8212; with the amount raised not even touching Rs 2,000 crore. Between April 1992 and March 1996, more than 4,000 companies raised over Rs 54,000 crore from investors through public and hybrid issues. Another 1,500 companies raised over Rs 34,000 crore through rights issues at very high premia. Experts say that nearly half of these companies have either vanished or stopped operations.

The Economic Survey had already expressed concern over the subdued stock markets 8212; saying these were were concealing reforms 8212; and asked the Centre to strengthen regulatory and surveillance mechanism to prevent market manipulation. 8220;The most difficult area in terms of obtaining a sound secondary market, concerns the problem of market manipulation, and those of establishing sound procedures of surveillance,8221; the survey said.

This doesn8217;t mean all8217;s lost. Experts say that the market will move on the basis of economic fundamentals. If the economy picks up in the coming months, Sensex will move upwards. If Jaswant Singh implements various Budget proposals to their logical conclusion, the sentiment will change. If targets set by him are studiously met by the bureaucrats and ministers, it will be reflected on Dalal Street. And this will also bring investors back to the market again. It also means the market will be watching whether Jaswant will push up the economy growth. It will see whether industrial activity will accelerate in the coming months. The experience in the last three or four years suggest that successive Budgets promised many things, but very few were implemented. Performance will now count more than ever.