The foreign brokerage is fretting over a possible shift towards short-term populism in government policies
Declining popularity of the Narendra Modi government could lead to populist measures in the short term, weakening market optimism, worries foreign brokerage UBS.
This, along with the tax issues concerning foreign portfolio investors, could adversely impact investor sentiment, UBS said in a report on Indian equities.
Its ‘India strategy’ report quoted a recent media survey which pointed at a drop in popularity of the Modi-led Bharatiya Janata Party government.
The survey projected that if Lok Sabha elections were held this year, the BJP would win less seats than it did in April/May 2014.
“The Modi government has already taken a number of positive steps for the economy in terms of ease of doing business, inflation moderation policies and even legislative reforms around coal, mining, labour and insurance. . . The govt has a majority mandate for four more years but will the above (the decline in popularity) lead to some short-term populist measures?” asks analyst Gautam Chhaochharia, head of research (India) at UBS, who has authored the report.
The government has already announced certain measures like a 50 per cent increase in compensation for crop damage brought on by unseasonal rain.
Banks have been asked by the government to restructure loans given to farmers impacted by the crop damage.
“Mr Modi might be using this as a way to balance any loss of political capital in pushing for the Land Acquisition Bill,” the report said.
However, it also notes, these measures might be 'socially justifiable, given adversities faced by farmers, is arguably not a freebie and, thus, not exactly populist'.
On the issue of imposing Minimum Alternate Tax prior to FY16 on FPIs, the report said it could be a repeat of 2012, when foreign investors withdrew money from Indian equities over worries about implementation of General Anti-Avoidance Rules on tax.
This time, though, the global appetite for risk is in favour of India, the report said.
Foreign investors have invested more than Rs 1 lakh crore (Rs 1 trillion) in Indian stocks in each of the previous three calendar years.
MAT is applicable on the income earned by FPIs and, from media reports, the total value of notices issued to its defaulters are $5-6 billion and could go higher.
The income tax department has asked London-based Cairn India to pay $3.2 billion for not deducting withholding tax on alleged capital gains.
The company has challenged this in court.
“...these are potential red flags which investors should not ignore,” the report said.
However, it said, economic recovery, while lower than market expectations, was still better than what is being projected.
Corporate earnings numbers and macro data are expected to matter more in the latter part of 2015.
Until then, reforms will continue to be important for near-term market sentiment, it said.
“The government has talked about passing GST (a national goods and services tax) in the second half of the Budget session of Parliament (which resumes on April 20). The Land Acquisition Bill is likely to be a key sentiment driver for markets in terms of the reforms agenda,” said the report.
