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Stocks react to a politically driven budget

— PHOTO: K. BHAGYA PRAKASH

ALL EYES ON FM: Industry representatives watching the budget presentation by Union Finance Minister P. Chidambaram on a big screen.

Stock price movements in the wake of a budget announcement have traditionally been keenly watched and analysed for what is taken to be the first (and also the quickest) verdict. In fact, now that reactions — not just from the markets but from sundry experts too — are available in ‘real’ time, many other verdicts, besides the one conveyed by the stock indices, are available. Recent experience suggests that these opinions also can influence stock prices.

Yet, it is the behaviour of the stock market more than any other that is seen as a vote for or against the budget or more precisely the Finance Minister’s speech.

All the business TV channels nowadays carry a graph of the indices (the Sensex and the Nifty) in the background even while covering the Finance Minister’s speech live. That’s not all. Reactions from experts are sought then and there on specific proposals without even waiting for the Finance Minister to finish his speech.

It is, of course, likely that these opinions or reactions influence the stock prices. The whole point about such instantaneous verdicts is this: the experts as indeed the markets are not in a position to study the whole budget in such a short time. Even in these days of the Internet, it takes much longer to go through the full set of budget papers and arrive at a balanced assessment.

It is hardly surprising then that the Finance Minister’s speech becomes the sole reference point for discussing the whole budget. All other documents — the finance bill, the demands for grants, the receipts budget and the expenditure budget, though integral to the budget — are to be studied at a later date. In any case, they are not available for instantaneous reactions.

That is why even a Finance Minister as articulate as Mr. Chidambaram has found it difficult to put across his most controversial announcement — the Rs. 60,000-crore rural debt waiver — without causing a downward swing in stock prices on February 29. The announcement of the massive debt waiver caused an immediate fall in stock prices.

The markets never recovered in the following week although on Wednesday there was a recovery of sorts.

It is, of course, the prerogative of the government to make such important announcements. However, the debt waiver package seems to have hijacked the whole budget.

The budget has had no word on how the funds for the massive write-off would be found. Till date there is no clarity. The Finance Minister has, however, promised liquidity for the banks.

Even if the government comes out with a transparent financing package, it is unlikely that bank stocks that were in the forefront in the pre-budget days would regain their lustre. Shares of public sector banks — even those of State Bank of India, which is tapping the market with a massive rights issue — tumbled.

More than the debt package, it is the fact that the government has forced a sharp U-turn in their (already measured) march towards greater reform that is a dampener for their stocks.

That they have very little autonomy was strikingly demonstrated by two PSB chairmen who claimed that the debt relief package would help the banks improve their financial performance. No elaboration has come, however, from either the government or the RBI. The debt relief package has been driven by politics. Only the most ‘loyal’ PSB heads will go public with their perceptions of economic merit in the announcement.

The debt relief package announcement alone did not bring down the markets. The week following the budget has witnessed extensive turmoil in the stock markets. On March 3, the indices lost heavily, the Sensex by over 900 points and the Nifty by over 270 points.

The declines continued into Tuesday but on Wednesday there was a recovery which contrary to some wistful thinking was not a harbinger of any sustained recovery.

The last day of the week, Friday, saw another huge fall.

Altogether, between February 28 and March 7, the Sensex lost more than 1850 points and the Nifty 514 points.

From the peaks reached in January — the Sensex was above 21000 — the fall has been quite dramatic. Regaining even part of the ground is going to be a tremendous task.

The worsening global situation has been another major factor. Then there have been specific developments. ICICI Bank will be making a large provision of $260 million on its investment portfolio and derivatives exposures of its subsidiaries in the U.S. and Canada. Reliance Energy’s buy-back offer has not enthused the markets.

Maybe, all the above are reinforcing one another in pushing the markets down. The budget had few proposals directly affecting the markets. Short-term capital gains tax has been increased to 15 per cent from 10 per cent at present. Securities transaction tax can be set-off against business income.

These two are seen to be negative. The second one will lead to more cumbersome book-keeping.

On a positive side, the permanent account number (PAN) has been extended to all financial transactions.

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