Taxation of foreign investors and a survey indicating declining popularity of Prime Minister Narendra Modi and potential dilution of India Inc’s patience are regarded as potential “red flags” for the Indian market by UBS.
Citing these issues, in its Asia strategy report, the foreign broking house tries to ponder on “what can go wrong”for Indian market even as it maintains its base case positive scenario for Indian market.
Taking an example from the reaction of foreign investors to concerns regarding GAAR (general anti-avoidance rules) in 2012 , UBS says that the recently served tax notices to FPIs ( Foreign portfolio investors) claiming minimum alternate tax (MAT) as well as tax demand of $3.2 billion from Cairn India could be potential speed breaker that investors should not ignore.
UBS muses over whether the BJP government would resort to populist measures in the wake of findings that show declining popularity of Modi even as the central government has a majority mandate for four years. The brokerage mentions a recent survey that showed a decline in Modi’s popularity, projecting fewer seats for BJP, if the Lok Sabha elections are held now. “An earlier poll for Bihar, where assembly elections are due by Nov- 15, indicated respondents’ preference for the JDU alliance over BJP,”added UBS.
UBS notes that after unseasonal rains in Northern and Central India have damaged crops in 17% of the sown area according to official estimates Modi announced a 50% increase in crop damage compensation even though likely in significant in terms of fiscal implications. Modi also asked banks to restructure farm loans for those whose crops have been damaged, which RBI had also instructed banks to do). “Modi might be using this as a way to balance any loss of political capital in pushing for the land acquisition bill,” said the strategy note by UBS analyst Gautam Chhaochharia.
UBS believes that dilution in corporate sentiment is a risk as the same is a key driver for the capex cycle.While corporate sentiment got a sharp filip after the general elections last year, in the recent past corporate earnings have turned weak while some business sentiment indicators have also moderated. “Recent corporate commentary in the media suggests that there may be a view forming that nothing much has changed on the ground,”added UBS note.