Indian Stocks Cap Worst Month Since 2011 Amid Budget's Tax Plans

  • Government retains FY17 budget deficit goal of 3.5 percent
  • ONGC plunges 10%; Maruti, Titan lead declines on budget levies

Indian stocks fell in a volatile session, with the benchmark gauge capping its biggest monthly loss in four years, after the tax proposals in Finance Minister Arun Jaitley’s budget disappointed investors.

What Can India Do to Shrink Its Fiscal Deficit?

Oil & Natural Gas Corp. slumped 10 percent and Oil India Ltd. slid to a record low after the government proposed a 20 percent tax on locally produced crude. Maruti Suzuki India Ltd. and Titan Co. retreated after the budget proposed duties on cars and jewelry. Bharat Heavy Electricals Ltd., the largest power-equipment maker, dropped to its lowest price in more than a decade.

The Sensex lost 0.6 percent to 23,002 at the close in Mumbai, after changing direction at least 15 times. The levies were on top of the proposal for higher dividend distribution tax on those earning more and a plan to boost the securities transaction tax on equity options trading -- steps that diluted the cheer stemming from the government’s pledge to further shrink its fiscal deficit that stoked speculation of an interest-rate cut by the central bank.

“The budget, for all its good points, has two weaknesses from an investor’s standpoint -- it doesn’t give a fillip to the industry and consumer demand," Ajay Srivastava, managing director at Dimensions Consulting Pvt., said by phone from New Delhi. “The economy and demand will struggle because the government is taking more money out of your kitty.” Srivastava said he has advised clients to exit from all sectors other than healthcare.

Deficit Target

The Sensex tumbled 7.5 percent in February, capping the worst month since November 2011, as global funds pulled $2.5 billion from domestic shares since Jan. 1 amid a selloff in emerging markets. Central bank Governor Raghuram Rajan last month warned of higher bond yields if Prime Minister Narendra Modi strayed from the deficit-reduction path, calling macroeconomic stability India’s “single most important strength" in a time of global market turmoil.

The government stuck to its target of bringing the deficit to 3.5 percent of the gross domestic product in the year that starts April 1. The gap will be 3.9 percent of GDP in the current fiscal year, as projected, Jaitley told lawmakers Monday. The move may help Modi win another rate cut as low global oil prices are forecast to keep inflation near next year’s target.

“There’s expectation that the RBI may cut interest rates,” Sampath Reddy, the chief investment officer at Bajaj Allianz Life Insurance Co., which has $6.5 billion in assets, said by phone. “The fiscal deficit is one of the most important things and it’s good that the government has stuck to the target." Reddy said he’s bullish on infrastructure stocks.

Crude Cess

Oil & Natural Gas plunged 10.2 percent, the most since Aug. 24. Oil India lost 3 percent to its lowest level since its September 2009 listing. Cairn India Ltd. fell 4.7 percent. The S&P BSE India Oil & Gas Index slid 1.5 percent. The government proposes to levy 20 percent tax on local crude. Producers current pay a fixed duty of 4,500 rupees a ton.

“The budget gives a relief to the upstream companies in terms of change in levy of cess from specific rate to an ad valorem rate of 20 percent," said K. Ravichandran, co-head, corporate sector ratings, ICRA Ltd. Still, “in the event of sharp rise in oil prices beyond $45 a barrel, it will negatively impact the industry’s profits."

Maruti Suzuki lost 5.1 percent to its lowest level since October 2014. Larsen & Toubro Ltd., the largest engineering company, slid 3.1 percent, taking this year’s loss to 16 percent. Hindustan Unilever Ltd. fell 2.3. percent, ending two days of advance. Titan plunged 4 percent to its lowest level since Aug. 4.

The Sensex is valued at 14.3 times its estimated 12-month earnings, versus a multiple of 10.8 for the MSCI Emerging Markets Index. Foreigners sold a net $85 million of Indian stocks on Friday, taking this month’s outflow to $920 million. They bought $3.3 billion of shares last year, the smallest in four years.

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