The Telegraph
Since 1st March, 1999
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Blows, global & local

Mumbai, Feb. 28: The sensex had started slithering even before finance minister P. Chidambaram had risen to present his budget speech. Blame it on the contagion effect of a meltdown in Chinese stocks.

At the start of trading, the sensex had plunged over 600 points on the global cue but had clawed back half of those losses when Chidambaram rose to speak.

The shaky sensex tottered again with the announcement of an increase in the dividend distribution tax. Cement, infotech and construction stocks tumbled — with all three sectors smarting from the tax blows in the budget.

The cement industry was clobbered by a differential excise duty structure designed to hold prices under Rs 190 per 50-kg bag, the infotech sector stumbled into the MAT net, while the construction companies were denied the benefit of a tax break if they were hired as sub-contractors to build infrastructure facilities.

The blow to construction companies was greater since the tax break was denied with retrospective effect from April 2000 — sending these stocks tumbling by almost 19 to 20 per cent.

The negative sentiment did not improve after that and the sensex plummeted by 540.74 points or 4.01 per cent at close to end below the crucial level of 13,000 at 12,939.09. This is the lowest close for the benchmark index since October 27 last year.

The market was looking for a reduction in the corporate tax rate and the capital gains tax: they weren’t conceded. Instead, he raised the dividend distribution tax to 15 per cent from 12.5 per cent.

Cement scrips floundered, IT stocks tanked and construction companies wobbled.

Gujarat Ambuja Cements Ltd plummeted 7.76 per cent on the BSE and ACC ended lower by 6.35 per cent. Similarly, Infosys saw its stock values shrinking by 5 per cent or Rs 109 and Wipro plummeted 7.34 per cent.

Although most marketmen were blaming finance minister for the carnage, there were a few who took a balanced view.

Hardendra Kumar, head of research, ICICI Securities, said: “The markets have shown a knee-jerk reaction. They opened weaker due to other reasons. After the budget proposals were presented, the IT and cement stocks put pressure on the index. But today’s fall must not be attributed entirely to the finance minister.”

Dhiraj Sachdev, vice-president and fund manager (portfolio management services) at HSBC Asset Management, also shares this view. “More than the budget, the market was influenced by global trends. Although there could be a recovery, over the short-run, the trend for Indian stock markets is negative and the downside could be in the region of 5 to 7 per cent’’.

The budget proposals came after most of the global indices witnessed a huge selloff led by China that saw Wall Street record its biggest drop since the September 11, 2001, attacks.

However, in early trading on Wednesday, European stocks trimmed some of the losses. Global currency markets also regained some poise.

Stocks plummeted and safe-haven government bonds surged around the globe on Tuesday after the biggest daily loss in a decade on China’s main stock market and weak US manufacturing data sent investors running for the exit on risky trades.

The Shanghai Composite index sank 8.8 per cent, in part on fears Chinese authorities would crack down on the speculation that drove the index to record highs this week. Other stock markets then fell like dominoes.

The Dow Jones industrial average and the Standard & Poor’s 500 Index both closed more than 3 per cent down, their biggest one-day percentage drops in almost four years, while Nasdaq suffered its biggest fall since December 2002.

Growing anxiety about Iran’s nuclear programme also fed the brutal reversal of investor optimism. “Every once in a while you see this sort of panic selling in the market. Until it settles down, the movement is drastic,” an analyst said.

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