If Nirmala Sitharaman wanted to enthuse foreign investors with the stimulus, she has missed the mark

The market rally triggered by Indian Finance Minister Nirmala Sitharaman’s recent confidence-inducing policy announcements seem to have fizzled.

On August 23, the government introduced a raft of measures, including relief to the country’s ailing automobile sector, a rollback of tax surcharges that hit wealthy foreign portfolio investors, and a Rs 70,000 crore capital infusion into public sector banks aimed at mitigating the liquidity squeeze and improving lending.

The measures helped to lift the pall of gloom that had been hovering over India’s equity markets since Sitharaman’s July 5 budget speech. By August 27, the finance minister’s sentiment booster had buoyed the National Stock Exchange’s Nifty index by 4.7%.

The rise was more pronounced in stocks from some of the most troubled sectors of the economy. Indices representing auto, bank and financial services companies rose 5.6%, 6.5% and 7.3%, respectively, on NSE in the period. However, none of these sectoral indices, nor the Nifty, were able to hold on to the gains in subsequent days, as reality sank in.

Capital flight continues

Foreign portfolio investors withdrew around Rs 1,600 crore from equities in the first two days after the finance minister’s announcement, even as the overall markets rallied. This suggests that while Sitharaman’s budget announcement of a surcharge on foreign portfolio investors may have ruffled feathers, a weak growth outlook is their biggest concern.

Foreign investors’ faith in the Indian economy has been shaken, after India’s GDP growth fell to a five-year low of 5.8% in January-March this year. Subsequently, tepid June quarter earnings have resulted in downgrades across industries.

Over Rs 15,700 crore worth of foreign capital was withdrawn from Indian stock markets in August alone, which has also had a devastating impact on the Indian rupee.

Historically speaking, August has been an inauspicious month for the Indian currency. In the last five years, except for 2017, where the fall happened in September, the rupee has depreciated 3.79%, 0.3%, and 3.7% in 2015, 2016 and 2018, respectively. This August, though, the fall has been steeper at 4.54%.

Besides the seasonal weakness, the rupee’s fall can be attributed to two factors.

Oil and gold prices, both of which blow up the country’s import bill, have risen around 10% this month. In fact, gold prices are at their highest level since April 2013. Additionally, the dollar has been firm amidst the US-China trade war.

The pullout by foreign investors has only exacerbated the situation in the currency market, which is likely to continue given the lack of investor confidence.

Miles to go

Investors have, by now, come to accept that there may be no more monetary stimulus plans to boost the economy, given the government’s stringent commitment to lower fiscal deficit, or the difference between revenue and income.

Historically, off-budget measures have only derailed fiscal deficit targets.

There are also concerns that the finance minister’s bank recapitalisation plan may not result in lower interest rates or higher loan offtake. Banks, stressed by bad loans, are unlikely to act on the government’s nudge to lend more to borrowers.

Such a ploy to depress real interest rates in order to boost consumption, which accounts for nearly 60% of India’s GDP, may turn counterproductive, and could potentially lead to another down cycle for banks.

While the need for strengthening of banks can never be overstated, equal attention needs to be given to procedural easiness. A prime example is the Goods and Services Tax.

While it was one of the boldest reforms of the government with the intention of bringing about a uniform tax code across the country, ease of doing business has suffered, while also stifling tax revenues. For this to change, GST compliance issues have to be addressed.

Strengthening the Real Estate (Regulation and Development) Act, giving it more teeth, and instilling life into stalled infrastructure projects is another area, that the finance minister must address soon.

Such measures will serve to ensure that India becomes attractive again, for foreign investors.

This article first appeared on Quartz.