A lethal cocktail of events ranging from a lacklustre budget, the possibility of an avalanche of shares worth Rs 3.9 lakh crores flooding the markets, taxing the foreign portfolio investors, the rise in petrol prices and insouciance on the part of the government to tackle slowing growth and give a fillip to sluggish private investment saw the Sensex lose 174 points.
The markets fears are understandable as Rs 3.9 lakh crores worth of shares could create a glut of shares in the market and see prices collapsing. But a word of caution is necessary as these fears could be exaggerated and premature since the government is yet to give a timeframe for releasing these shares. On an earlier occasion, companies were given three years to comply with the requirements. Investors will have to wait to see the final outcome of this proposal that has yet to be vetted by the market regulator, the Securities and Exchange Board of India. Stock markets are known to react to every passing whim and rumour that is an opportunity for day traders and punters to makes huge profits. It is the nature of the beast, as they say.
It is interesting to recall that one of finance minister Nirmala Sithraman's predecessors, P. Chidambaram, had said he would not lose sleep over a fall in the stock markets as he is more concerned with Khan Market (a reference to rising prices that affect the people). Perhaps the Modi government shares this sentiment, though the CBDT chairman hinted towards Foreign Portfolio Investments (FPIs) and Alternative Investment Funds (AIFs) that they could skirt this requirement by opting for a corporate structure. FPIs, as is known, invest under the trust route so are liable to be taxed under the super-rich category. But these worthies are known to have their cake and eat it too, so it is unlikely that they will bite this bait.
This proposal of Ms Sitharaman however should be music to the ears of retail investors who will have a chance to build their portfolios at attractive prices as these shares of the effected promoters enter the market. Share prices are attractive presently as the Sensex also lost 800 points on Monday and did not make up for it on Tuesday. Whilst the markets do not necessarily reflect the state of the economy, the fact is that the economy is passing through difficult times and has to be bailed out with the people's hard-earned money. The rise in petrol and diesel prices, for instance, is expected to mop up Rs 24,000-28,000 crore annually. These crores will come out of the pocket of the common man and the farmers who use diesel for their pumps. There is no way for citizens to skirt this as in the case of the super-rich who have been shown a way out. This rise will have a cascading effect on transport and cost of goods and services and will be further aggravated by VAT imposed by the state governments. Tough times ahead for those at the bottom of the pyramid....