Market speaks

Capital markets announced their verdict on the Budget after studying it with a thumbs down

One is always told that the devil is in the details, so market reactions to the Union Budget while it was being presented were tempered, particularly in the new era of the GST where few major indirect tax changes that materially impacted companies could be announced on the floor of the Lok Sabha. However, as tax consultants and chartered accountants pored over the Budget through the evening and into the night on Thursday, the reaction on the whole was one of disappointment. Sure, any Government has to look at delivering social services to a bulk of the population which is poor but most companies and professionals are disappointed that the Budget gave them zilch. Indeed, the Budget will end up taxing higher income Indians even more with a higher cess and financial investors were alarmed albeit resigned to the long term capital gains tax on share market investments and equity-linked mutual funds.

The Budget is clearly being seen as an election-oriented one given the massive increase in social sector spending. Not just in healthcare but also by expanding the scheme to give LPG connections to lower-income families as well as rolling out a scheme for free household electrical connections. But the Budget has in the eyes of some taken the sheen off the Modi Government's reputation of being pro-business. While several Opposition politicians gave their usual hackneyed reactions terming the Budget as ‘pro-business', nothing could be further from the truth. And the market reaction on Friday are just indicative of that.

Add to the mix the defeat of BJP candidates for two Lok Sabha seats in Rajasthan, and the reasons for the markets becoming a bit jittery at the prospect of political uncertainty a year ahead of General Election is understandable. The BJP is almost certain to lose a couple of big States this winter when they head for Assembly elections though talk of ‘simultaneous polls' has been rising. While Narendra Modi remains a favourite to win in 2019, the feeling is maybe not with the majority he had in 2014. While social schemes in a poor country like India are important as it is increasingly becoming apparent that the 'great' Indian middle class is just a few million households and a majority of Indians are still either lower-income households or in poverty, India must begin to attract investment from abroad to jumpstart social and economic mobility. This could be an election Budget and the ‘suit-boot' jibe Rahul Gandhi made at Narendra Modi seems to still be haunting the latter, driving him to social sector spending, but improving India's investment atmosphere is they key even for these measures to be effective.

The Government is in a bind because it has to both improve India's attractiveness as a global destination for investment as well as work towards improving people's lives. This, however, should not be a zero-sum game. One thing is certain: Attacking the Modi Government as being pro-business after this Budget will not work other than on random Whatsapp forwards. The Opposition will need to find a new tack and in that respect the fall in the market might even have done Modi a favour.