Restoring the faith of foreign portfolio investors and corporates
FPI flows into equity are the best barometer of global investor faith. Since the budget, the FPIs have made net withdrawals from Indian equities to the tune of $4bn. Of course, FPIs were investors in debt but that is more about interest rate differentials. Finance Minister announced the following:
- Foreign investors have been exempted from the additional budget levy
- Controversial Angel Tax under Section 56 (2)b scrapped
- Violation of CSR obligations will be civil and not criminal offence
Reviving the auto sector was much called for
The auto sector was always expected to be the nucleus of the Finance Minister’s booster dose. Some of the key announcements were as under:
- Depreciation on vehicles increased from 15% to 30% for one year to make inventory holding more productive
- Government to lift ban on purchase of new vehicles for various departments
- Increase in registration fee deferred for one year till June 2020
De-clogging the financial system
The financial system is the nucleus of economic growth and that is where most of the macro problems begin. The FM has made some important announcements towards de-clogging the financial markets and improving flow of credit.
- Moving most loan baskets towards MCLR based pricing
- One-time settlement package for MSME sector
- Aadhar based KYC for demat accounts and mutual funds
- Developing offshore rupee market to avoid rupee volume exports
- Time bound refunds for GST cases
- Protection of bona fide decisions of bankers
Repo based pricing is a good way to pass on rate cut benefits seamlessly. However, banks still prefer cost-based pricing. It has been noticed that when forced to accept dynamic pricing, banks find new ways to charge customers like MAB charges. Developing the rupee offshore market is justified since the rupee has lost a lot of its volumes to Dubai and Singapore. But that is a function of volumes, liquidity and also costs (like STT). Unless these are addressed, the offshore market for rupee cannot really take off.
More like Santa Claus; less like the Messenger
The FM has looked more like Santa Claus with year-end goodies rather than the messenger who brings the big news. The focus should have ideally been on the big picture like GST on cars, scrapping of higher surcharge, scrapping LTCG tax, etc. These could have made a substantial difference to investor sentiments. The FM should have also kept the context in mind. Global trade war is escalating, BREXIT is in a state of flux, global economy is slowing and China is getting hyperactive in managing its currency. In such a situation, incremental measures may not really be helpful as is apparent from the stock market reaction to the FM’s announcements. It is time to think out of the box on the economy now!