Stock Markets Price In Budget Positives, Wait For Surprises
The indices ended lower for the second consecutive session on July 22 as markets turned cautious
On Episode 345 The Core Report, financial journalist Govindraj Ethiraj talks to BVR Subbu, automotive industry expert and former president of Hyundai Motor India.
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SHOW NOTES
(00:21) The Take
(08:05) Stock Markets Price In Budget Positives, Wait For Surprises
(09:28) Why Some Car Companies Are Pulling Back
NOTE: This transcript contains only the host's monologue and does not include any interviews or discussions that might be within the podcast. Please refer to the episode audio if you wish to quote the people interviewed. Email [email protected] for any queries.
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Good morning its Tuesday, the 23rd of July and this is Govindraj Ethiraj broadcasting and streaming from and headquartered in Mumbai city but in transit right now.
Before I kick off, my episodes for the next 8 days will be intermittent and shorter, as I am away attending a conference.
The Take
As you hear or read this, the Union Budget documents 2024 have been printed and will be ferried to Parliament where the Finance Minister will present it.
Budgets in India command more attention, including from mediapersons like me, than perhaps any other country in the world.
Their impact, I would argue, over time, is usually the inverse.
Which is that while there may be a few good things, there will also be fresh hurdles for example in the form of fresh tax laws, which makes life usually more complicated for everyone, particularly small businesses.
While we speak of reforms in the real world we have reversed course.
For example, reform all through the 90s and 2000s meant lowering of tariffs, we are increasing them now.
Reform meant greater competition and reduced role for the Government in business.
There is greater competition in many areas for sure but the Government is also playing a greater role in business by staying in business, much more than in a long time.
I have spoken to several tax experts in both indirect and direct tax in recent weeks. They argue for specific steps to be taken in areas but also say all their clients are pleading for simpler tax regimes and consistency in policy and laws.
Think angel tax, a law which should have been thrown out but instead has got more and more complex and onerous even as it has tried to create exemptions.
The approach to hang on to laws and keep writing fresh guidelines around and in addition to them increases the tax compliance effort for taxpayers.
India is not receiving foreign direct investment like before. Many investors are getting out, since their time as venture capitalists or private equity players has also run out.
Which means this money while welcome was not long term investment in the nature of hard, ground based investment.
The Reserve Bank of India (RBI) in its Annual Report 2023-24 said that the net FDI flows fell to US$ 10.6 billion during 2023-24 from US$ 28.0 billion a year ago. “Net foreign direct investment (FDI) flows were, however, lower on account of a rise in repatriation of FDI from India.”
The FDI inflow in FY24 decreased by approximately 3.48 per cent from FY23, i.e., from $46 billion to $44.4 billion, data by the central bank showed.
I glanced through the highlights of the Economic Survey, an annual document presented by the government ahead of the Union Budget to review the state of the economy. It provides an overview of the short-to-medium-term prospects of the economy.
Overall, I think it's a fairly frank and fair assessment with some critical views. Economic surveys do not necessarily translate into policy action but the independence of views is a welcome sign.
There are useful recaps, including the management of inflation, where there is acknowledgement that unless we invest more in supply chains and storage, food prices and thus inflation will keep haunting us.
One good news is that the Economic Survey also speaks of the private sector’s role in more private investment, thanks in turn to strong balance sheets. To what extent that will happen is of course a question mark.
It speaks of the China + 1 factor and rightly points out that it is not a given that manufacturing will automatically move to India.
Put differently, the Economic Survey also reflects to some extent what industry and objective viewers have been saying across various aspects of the economy.
Elsewhere, it is a fact that household capital formation is growing sharply, as evidenced by the sheer supply and demand of real estate stock.
Around business, the Survey makes a key point.
Which is that focus must turn to bottom-up reform and strengthening the plumbing of Governance so that further growth could follow.
There is also a recognition of the fact that small enterprises will have a greater role to play and the conversation that follows will throw some perspectives on that.
India's market capitalisation-to-GDP ratio, also known as the Buffett Indicator, is blinking red and the Economic Survey tabled in the Parliament today acknowledged it. The report warned investors that the soaring m-cap-to-GDP ratio is not necessarily a sign of economic advancement or sophistication.
There is fresh recognition of the fact that derivatives trading is now crossing levels that are past dangerous. And we must do something about it.
As we have argued about it here before, over exposure to speculative trading is not a systems problem alone as market systems in India are reasonably well secured to handle sudden and large falls or rises.
Governments also have to think of the social aspect of it, as they have been for some time now.
When young people borrow money and invest in derivatives or crypto, they are creating stress for themselves and their families. This makes it a social problem.
The economic survey says that financial assets are claims on real goods and services. If equity market claims on the real economy are excessively high, it is a harbinger of market instability rather than market resilience..
The Economic Survey is prepared by the Economic Division of the Department of Economic Affairs in the Ministry of Finance under the supervision of the chief economic adviser.
To its credit, the Survey spends a fair amount of space on impact of climate, assessing it, including the fact that the global pursuit of energy-guzzling technologies such as Artificial Intelligence and mining rare earth minerals in large quantities has only contributed to higher fossil fuel consumption.
This is directly at odds with the stated objectives of climate change mitigation.
And finally, jobs.
The Economic Survey says India’s labour market indicators have improved in the last six years, with the unemployment rate declining to 3.2 percent in 2022-23.
The net payroll additions under EPFO have more than doubled in the past five years, signalling healthy growth in formal employment.
These figures are of course not fully representative since there is some confusion now on which data sets to believe.
Jobs are not a new problem and it is not fair perhaps to blame the federal Government entirely.
Because in the same decade as say job creation has slowed down in some states in the country or not really picked up, it has done so in other parts. This is of course linked to private investment and the ease of putting up a factory or some other venture and of course the existing ecosystem, like IT in Bangalore, Hyderabad, Chennai, Pune and Delhi or automotive in Pune, Chennai, Delhi and Gujarat.
There are many more such examples.
But you can see some politicians reacting to the problem, albeit with ill conceived steps, like Karnataka did recently by trying to reserve private sector jobs for locals, defined as those who can speak the language and have lived in the state for 15 years.
More on that shortly.
Meanwhile, among other news.
Stock Markets Price In Budget Positives, Wait For Surprises
The positive aspects of the Union Budget are priced into the Sensex. The question is of course if any surprises will come on the tax front.
Let's see.
Meanwhile, the indices ended lower for the second consecutive session on July 22 as markets turned cautious.
At close, the Sensex was down 79.43 points at 80,525.22, and the Nifty was down 21.60 points or 0.09 percent at 24,509.30.
The market was dragged down by Reliance Industries and Wipro after the companies posted weaker-than-expected quarterly results, with volatility rising a day ahead of the budget, Reuters said also referring to suggestions that a long-term capital tax on equities could be raised.
The rationale for these changes may be to create an even playing field between asset classes, Axis Bank said in a note put out last week.
In India, gains on listed shares are taxed at 10% if stocks are held for 12 months, and at 15% if held for less than 12 months. But other asset classes such as debt have higher long-term capital gains tax of 20%.
Why Some Car Companies Are Pulling Back
We spoke of FDI earlier. One area where India has seen considerable investment is automotive and continues to do, including in the area of electric vehicles.
But we are also seeing some companies pull out or want to dilute their presence.
Sticking to automotive, GM and Ford have pulled out while Skoda India has said it wants to look at bringing in an Indian partner. The Korean and Japanese companies, apart from the premium German cars, are of course still going strong even as newer ones in the electric space are set to arrive.
Why is Skoda wanting to pull out ?
The answer is not clear to me since Skoda seems to have been around for some time now and it is not clear what an Indian partner would bring, apart from capital of course.
This also tells us that FDI is a little more nuanced now, driven by specific opportunities where they come and not where they do not.
I reached out to BVR Subbu, former Director of Hyundai Motor India which itself is looking at a mega IPO in India now, also reflecting its continued focus on India, possibly strengthening its roots and raising capital at the same time.
I began by asking Mr Subbu, what could be driving companies like Skoda after so many years to consider bringing in a partner?
