Foreign brokers and institutions’ expectations were dashed when the recent Union Budget did not meet their expectations after being seduced by the finance minister not so long ago. Why is it not a surprise to us?

Just when foreign brokers and investors were getting ready to toast their cocktails to the possibility of the finance minister pandering to their expectations, they were taken aback by a ho-hum budget that addressed the vast majority of the electorate instead. Earlier, we had written how the finance minister was wooing foreign capital and broking firms like Citi were falling for it. In a pre-budget meeting Palaniappan Chidambaram, finance minister, had addressed several foreign institutional investors (FIIs), debt investors and corporates in Singapore and Hong Kong and briefed them of the status of India’s economy and how he hopes to fix it by magically reducing the fiscal deficit to 3% by 2016-2017. At that time we had said that this would not be possible given that the general elections nearing and that the government was draining away coffers to win votes. Hence, there was no way that any rational investor could buy the logic. But foreign investors indeed fell for this and got their hopes dashed.
 

The reality is captured by the words of Manishi Raychaudhuri, Asia Pacific Strategist, BNP Paribas, who wrote in a report on Friday: “Following FM Chidambaram’s meetings with investors across the globe in January, the financial markets were hopeful of a strong pro-growth message and fiscal consolidation signals in the budget. Disappointment came on both counts. The pro-growth message was diluted by sharp cuts in planned expenditure in FY13. The attainability of a 4.8% fiscal deficit looks suspect—though more achievable than previous years’ targets. In summary, we see no explicit direction to the budget and we are back to considering fundamental drivers and global cues.” The BNP report is titled: “Let’s Forget the Budget and Move On”.
 

However, this isn’t surprising to us, given our understanding of finance minister, P Chidambaram. In the Fortnightly Market View column readers were cautioned that the finance minister is not exactly a good ‘listener’. Anybody who has observed the finance minister carefully over the years would have seen this coming.
 

BNP Paribas was disappointed that the budget did not address growth concerns (i.e. lack of growth). The report stated: “The budget for FY14 didn’t quite give a sense of direction. Ostensibly the thrust was on growth—with a 29.4% increase in planned expenditure, but in reality that increase was on the back of a 17.5% reduction in FY13 planned expenditure.”
 

Furthermore, with respect to double-taxation, the BNP Paribas report mentions: “The classification of Tax Residency Certificates (TRC) as “necessary but not sufficient” documents for claiming tax benefit under DTAA is bound to create uncertainty in the market about fund inflows from countries that have double taxation agreements with India. Such uncertainty is already visible in Friday’s market reaction.” It is pertinent to note that GAAR has been pushed and postponed to 2016, and therefore caused enough uncertainty so far, and will continue to be uncertain till it is finally implemented. It is also pertinent to note that domestic investors were actually taking the opposite tack as foreign investors—by selling in droves. Perhaps, domestic investors know the ground realities better than foreign investors and brokers. We had written about this earlier as well. Click here to read about the differences between FIIs and DIIs in terms of fund flows.
 

This isn’t the first time that foreign investors’ expectations were belied and it won’t be the last either.