A combination of factors, including disenchantment with the Modi government leads to a sharp fall of an already overvalued market
The 30-scrip BSE Sensitive Index (Sensex), a benchmark index of the Indian equities markets, plunged over 700 points on Wednesday. Traders and market players attributed fall to several factors that weighed heavily on the minds of investors and businessmen on the eve of Narendra Modi government completing one year later this month.
The Sensex Bombay Stock Exchange (BSE), which opened at 27,473.36 points, closed at 26,717.37, down 722.77 points or 2.63% from the previous day's close at 27,440.14 points. The index had made a lifetime high 30024.74 on 4th March just after a lacklustre Union budget. Almost all the sectors were trading in red. Capital goods, power, realty, consumer durables, metal and banking stocks came under heavy selling pressure. The 50-scrip Nifty of the National Stock Exchange (NSE) tanked 227 points or 2.74% to close at 8097 points.
Of the 30 stocks in the Sensex, only one – Bharti Airtel – was a gainer. Of the 29 stocks that fell today, BHEL fell by 6.07%, ICICI Bank fell by 4.77% and Larsen & Toubro by 4.65%. The other big losers were Maruti, NTPC and Axis Bank. The BSE S&P capital goods index tanked by 3.76%, power index fell by 3.55%, Realty index dropped by 3.32% and consumer durables index fell by 3.12%. Oil marketing companies such as Indian Oil, Hindustan Petroleum, Bharat Petroleum fell 3-5% as oil prices crude oil went past $60 in Nymex. ONGC fell 3% and RIL 1.5%.
There is no single reason for this sharp decline. Over the past one year, the markets have been rising on hope that the Modi government will bring in far reaching reforms that will ease the problems of the doing business, and allow them to expand and create jobs. The market players also hoped that the PM will keep up his poll promises of “minimum government, maximum governance” by cutting down on wasteful government expenditure and reforming the public sector companies. In anticipation, the Sensex hit 30,000 when it was valued at 23 times the profits of four trailing quarters.
But the reality looks a bit different now. Arun Shourie, a member of the previous Union government led by the Bharatiya Janata Party, and an important intellectual of the right went on the air on May Day blasting the Narendra Modi government for lacking in clear thinking, promising a lot but delivering too little and projecting more than what it has achieved.
He pointed out that there is no big picture in the economic policy, only expediency. He also charged that the Prime Minister’s Office is a large, centralized power centre and is now a bottleneck. As a result, India Inc. keeps warning about lack of change, and on the ground, investment has not picked up while the government spends time and energy managing the headlines.
Worse, a government that promised a stable and non-adversarial tax regime, suddenly sang a different tune. In late 2014, the Modi government started sending demand notices to FIIs for paying MAT on capital gains even though these perversely overrode the laid down benefits enjoyed by foreign entities under the country's bilateral tax treaties and most FIIs say that they have already distributed profits of prior years and so may not have the money to pay the tax.
This was first time ever, any government had levied MAT on FIIs when the law is totally unclear on this, and Modi government has promised no tax terrorism. When the FIIs rushed to the finance ministry, Mr Jaitley used his discretion and added long-term capital gains of FIIs to the list of items exempt from MAT in the Budget of 2015.
The government has subsequently backed down but its move on MAT set against little change in most other areas, has shaken up the investor and business community who suspect that this government, is interested in maintaining status quo. The largest public sector banks remain headless while the government is trying to bring in dubious criteria to appoint PSU chiefs. Public sector companies have neither got better boards, nor more autonomy. The government has been unable to get the opposition on board to make legislative changes it says it needs to get going on the economy. Indeed, its lack of success on several fronts has rejuvenated the opposition.
The government was given a stroke of good luck when oil prices crashed, allowing the rupee to remain stable when the dollar was shooting up over the last six months. This comfortable period is over too. Oil price has risen 50% from the low of $42 it hit on March 18th. Now rupee is again under pressure, companies are unable to grow and there is worry about when the Modi government will start delivering on governance and reforms. In the circumstances, the market, which has been in the overvalued zone for the last six months, decided to give up some gains.