Sensex: no cause for panic

Sensex: no cause for panic

FPJ BureauUpdated: Thursday, May 30, 2019, 12:22 AM IST
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PTI Photo by Mitesh Bhuvad(PTI6_24_2016_000086B) |

Yes, the share markets are bleeding; some will say they are in a free fall. If you consider that since the Budget the Sensex has lost over two thousand points, it would reflect a really scary situation. But contrary to what the fall in the Sensex suggests, the actual economic conditions do not warrant any scare-mongering. Markets are prone to be victims of the herd instinct. Also, global markets, led by the US, are under a huge selling pressure.

The bellwether Dow index has lost over 2,200 points in the last two sessions alone. European markets too have registered considerable losses. In other words, the Budget was a factor, but not the only factor for the sharp correction in the markets. First things first. We should remember always that the Sensex is meant to move both ways, and not only upwards. If it crosses a thousand points in a very short time, market men celebrate. If it goes down, they should not mourn. It is part of the ebb and flow of the markets the world over.

As for the Budget hits to the market, the long-term capital gains tax of ten percent on the grandfathered price as on January 31, 2018, actually should not pinch a vast number of retail investors. It is the mutual funds and other institutional investors who might feel  the pinch. And they are the ones most likely leading the sell-off post-Budget. The fall in the Sensex in three straight sessions seems to have already persuaded the authorities to offer a palliative. A Union Finance Ministry spokesman on Tuesday sought to reassure the markets that they might revisit the specific concerns behind the selling spree, though he again asserted that the downturn was a global phenomenon.

The US Fed has had a change of guard at the top a few days ago. Given the inflationary pressures building in the US economy, and the long-standing need to slowly taper off the liquidity faucet following the pick-up in growth, the Fed is most likely set to revise the rate at its next review meeting soon. A 0.10 basis-point increase could anyway lead to the flight of foreign funds from the emerging markets, more so from India. The long-term capital gains levy hurts the foreign investors more than domestic retail investors. They also have been somewhat alarmed by the rise in the fiscal deficit in the current financial year from the earlier estimated 3.2 to 3.5 percent of the GDP.

But, in reality, this is not something to spook the markets. No. The real reason is the global sell-off. It is true that the scare-mongering following the Budget, might discourage retail investors to put their savings in mutual funds. Of late, domestic mutual funds had emerged as major investors in the markets, offering handsome returns to investors. Given the disincentive against savings in government instruments, especially in national savings certificates, post office savings, and even public provident fund, the middle- income groups had begun to put their savings in various privately and publicly-owned mutual funds. In the last two years, on the shoulders of an incessant rise in the Sensex investors had reaped rich dividend. Notably, the assets under management of the mutual funds industry have steadily grown from Rs 3.26 lakh crores in 2007 to Rs 21.27 lakh crores in 2017. Some of the savings which were earlier invested in fixed deposits and other bank instruments were now going to mutual funds. The fall in the Sensex would cause the middle-class savers to consider other avenues. Probably that is precisely the objective behind the levy of the long-term capital gains.

The Government is keen for the manufacturing sector to pick up, but there has hardly been any new investment in the sector. Aside from the legacy of a huge debt burden and over-capacities, relatively cheap imports, especially from China, have pressured the domestic industrial sector. The revival of the sector is essential for creating jobs. Hence the levy of a higher customs duty on a select number of goods. In short, the economy, particularly after the absorptions of the twin shocks of notebandi and GST, is well on its way to recovery. Even the GST has become trouble-free, though the implementation of e-billing for internal movement of goods, expected to be enforced from the 1st of February had to be deferred. This was unfortunate. It should be enforced only after ensuring that the e-platform can function smoothly. As for the Sensex, the Government should not react in panic. Markets do go up and down everywhere, and not just in India.

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