GAAR-supported bounceback tough to sustain

By Ambareesh Baliga
September 2, 2012

(The views expressed in this column are the author’s own and do not represent those of Reuters)

A reversal after four weeks of gains saw the Nifty closing 2.38 pct lower at 5258. The mid-cap segment of the market caved in earlier with the large caps holding fort till Thursday. The Parliament logjam continued on the “Coalgate” issue and hopes of any worthwhile business being conducted in this monsoon session are dim. Given the political scenario, the war-rooms of political parties are getting into election mode, which could be earlier than 2014. This too will hardly raise hopes for Indian markets as the electorate seems too fractured to have a strong government which would have the ability to push through reforms, including non-populist ones.

Finance Minister Palaniappan Chidambaram who had raised hopes of implementing far-reaching reforms may not be third-time lucky. Though he has been among the most effective finance ministers in the past, the performance is also a factor of the environment which is not conducive currently. Apart from negating the effects of GAAR and tinkering with minor irritants in the system, I doubt whether he will be able to take any path-breaking measures. The Direct Taxes Code too has been deferred by a year.

World markets also ended the week on a softer note though Friday saw improved sentiment with Fed Reserve Chairman Ben Bernanke defending earlier stimulus measures. The European Central Bank meets on Thursday and the U.S. monthly jobs report on Friday would be keenly watched. China manufacturing PMI for August fell to 49.2 pct indicating a shrinkage as the result of the euro zone slowdown. This in turn will have a negative effect on commodities, especially metals and drive the authorities for further stimulus.

Closer home, GDP grew 5.5 pct against a consensus estimate of 5.2 pct. Auto sales continue to weigh in favour of diesel vehicles as the government is not in a position to tinker with diesel prices. A recent study indicates that nearly $4 billion of diesel subsidy is enjoyed by affluent consumers, accounting for nearly 22 pct of total consumption.

Maruti’s domestic sales fell 35 pct due to the month-long Manesar plant lockout. On the contrary both diesel vehicle manufacturers, Tata Motors and Mahindra & Mahindra, saw higher sales of 33 pct and 20 pct respectively albeit on a lower base.

The monsoon continued improving to significantly bridge the deficit which has reduced to 12 pct below long-term average (LTA). This will moderate the pressure on the central government from those states which have been clamouring for drought relief. The effect of El Nino too is not expected to be severe as it would be more towards the end of the monsoon season. Sowing of kharif crops increased to 35 mln hectares which is marginally higher than the normal of 33 mln hectares. However, certain kharif crops like oilseeds, pulses and coarse cereals are still affected.

Gold was an outperformer in international markets, bouncing sharply to $1690 in the week on stimulus expectation, thus pushing prices in India to a life-time high of 31,750 rupees per 10 grams. Though gold imports have steadily fallen post the imposition of import duty and a weak rupee, the smuggling of gold saw a multi-fold rise. Gold impounded in the last quarter was 272 pct higher at about $170 mln which could only be the tip of the iceberg.

FIIs continued to buy during the week, lapping up equity worth $675 mln. Realty stocks have been under pressure due to rising inventory. The demand is not improving despite freebies and higher commission structure for the intermediaries. Maharashtra realty players had another reason to sulk due to the imposition of 5 pct value added tax with retrospective effect from 2006. The banking sector was also under pressure due to increasing NPAs and an expected increase in corporate debt restructuring. The scenario could get bleaker if the power, telecom and infrastructure sectors have larger number of NPAs in the coming years due to regulatory, fund raising and supply-chain issues. Metals are expected to be weaker looking at the slowdown in China and the euro zone.

The deferring of GAAR by 3 years and keeping treaty nations such as Mauritius and Singapore out of GAAR’s purview will boost sentiment when the market opens on Monday. Sustaining those sentiments would be difficult in the week ahead as the political drama on Coalgate is expected to continue. The Nifty has support in the region of 5180-5200 but crossing 5340 again would be an uphill task. Unfortunately, Prime Minister Manmohan Singh’s “animal spirit” seems misplaced. Instead of the economy, it is visible in the political arena with the opposition smelling blood. Finally, this could lead to blood on the street for the Indian investors who are keen to desert it.

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