Markets are about sentiment and the state of confidence among businessmen to invest, and in consumers to spend. Both were dented by the 2019-20 Union Budget, which was seen by many to be not doing enough to address a deepening economic slowdown, and even as one containing proposals that were retrograde. Thus, while regular car and two-wheeler sales were showing a clear contraction trend from late-2018, the budget dished out sops, including income tax deductions, for purchase of electric vehicles. Instead of making Indian industry globally competitive by bringing down the corporate tax rate to a uniform 25 per cent (as promised in the 2015-16 budget), Finance Minister Nirmala Sitharaman increased the surcharge on inpidual taxable incomes beyond Rs 2 crore and hiked the customs duty on gold, polyvinyl chloride, newsprint, books and a host of other items. When the effect of the higher surcharge on foreign portfolio investors (FPI) registered as trusts or associations was pointed out, they were simply told to convert themselves into companies. Adding insult to injury was a Companies Act amendment that made not spending the mandatory 2-per-cent-of-profits on corporate social responsibility (CSR) activity a criminal offence.
The markets responded in the only way they could: Since the budget s presentation on July 5, the BSE Sensex has shed 3,207 points or over 8 per cent, while the domestic currency has weakened by Rs 3.16 against the US dollar, with FPIs alone making net sales of $3.5 billion-plus in Indian equities from last month. Meanwhile, real sector data whether relating to core industries output, auto sales or reports of job losses has continued to worsen. It has taken this worsening crisis for the Narendra Modi government to finally respond. On Friday, Sitharaman announced withdrawal of the enhanced surcharge on capital gains against equity sales by both FPIs and domestic investors, while CSR violations shall be treated only as a civil liability. To boost flagging auto sales, an additional 15 per cent depreciation, taking the total to 30 per cent, has been granted on all vehicle purchases made till March 2020. Further, the earlier proposed increase in registration fee for new petrol/diesel cars and two-wheelers has been deferred to June 2020. Sitharaman has further assured consumers that their BS4 vehicles bought before March 31 will not face de-registration after the new BS6 emission norms come into effect.
Whether these measures will have the desired impact in terms of bringing back investment and consumption demand in the economy remains to be seen. For now, they send out a positive signal of the Modi government s willingness to engage with and respond to the reality on the ground. What began as PM Modi s Independence Day address extolling the role of wealth creators has now been taken to a pragmatic reaching-out on Friday.