Markets Take A Well Deserved Breather

Equity markets settled in the negative zone on Friday, driven down somewhat by HDFC Bank which had an unusually good run in the week before

8 July 2024 12:30 AM GMT

On Episode 334 of The Core Report, financial journalist Govindraj Ethiraj talks to Girish Vanvari, founder of Transaction Square as well as Manish Raj Singhania, president of the Federation of Automobile Dealers Association (FADA).

Our Top Reports For Today


(00:00) The Take

(04:49) Stories Of The Day

(05:29) Markets take a well deserved breather, Sensex dips.

(06:14) The not so angelic angel tax

(17:00) The importance of walk-in customers in auto dealerships

(27:01) Real estate surges 50% in 5 years in Delhi and Mumbai, can it sustain?

(28:42) Why Air France is projecting a revenue fall despite the Paris Olympics

NOTE: This transcript contains only the host's monologue and does not include any interviews or discussions that might be within the podcast. Please refer to the episode audio if you wish to quote the people interviewed. Email [email protected] for any queries.


Good morning, it's Monday, the 8th of July and this is Govindraj Ethiraj broadcasting and streaming from and headquartered in Mumbai, India’s financial capital.


We have a date now for the Union Budget to be presented by the new Government that has come in which of course is the old Government in most ways.

The Budget will be presented on July 23. This is what you could call the Final Budget as the Interim Budget was presented on February 1, being the scheduled date but then general elections were upcoming.

While the markets had of course priced in a return of the current Government, it would be interesting to see whether the outcome of the elections, which is not the absolute majority everyone was expecting, will change the tenor of the Union Budget.

Translated, would there be more giveaways or could it go the opposite direction, more taxes on better to do ?

That in turn depends on why the Government thinks it lost. And that of course is a different story and discussion tempted as I am to get into it.

Now, there are many asks and wants ahead of any Budget, as there have been all these years. The Government has to balance its books so if it gives away, in the form of lower taxes or concessions elsewhere, it will also take away.

The Government clearly is not depending on windfall gains, at least so far, like selling shares in state owned or public sector units though there can not be a better time than now that we can see and feel, given how prices have shot up to valuations which even the most liberal of seasoned investors are having some doubts about.

I will pick a few today and keep coming back in the coming days.

Individual businesses may want specific issues addressed, they could range from of course taxes levied or tariffs imposed, for instance the steel industry may argue for higher tariffs so as to keep out Chinese or Vietnamese steel and those who consume steel as a raw material in India may lobby for lower tariffs.

Then there is Goods and Service Tax which can go into several hours.

At a very broad level, businesses in India want two things as I have found in repeated conversations recently and over the years.

I will highlight these two for today before getting into some specifics in the coming days.

The first is the simplicity of law. Yes I know we have cracked the ease of doing business scores but that is not the sentiment i hear when i talk to smaller businesses or for that matter large ones.

Yes, it is great that we can start a new company in a week or so but it's of no great help if it gets more and more challenging as your business grows, including with compliances and state and central level that can wear you down.

There is nothing to suggest that laws that govern the very basic existence of a firm in India have become simpler or easier to navigate.

On the contrary, it's the opposite. My conversation with Girish Vanvari on the provisions of angel tax and how they have evolved later in the show will give you a sense of what I am talking about.

Angel tax, where companies in India - particularly startups - could end up paying tax for someone taking a stake in the company because that premium paid for the shares is being treated as income.

This is a classic case that illustrates everything that is not working in the Indian tax system.

Angel tax was first introduced in 2012 by Pranab Mukherjee as Finance Minister to address money laundering. You would think a new Government, which came in 2014 and was besieged by pleas from the startup community in subsequent years to remove this tax would do away with it.

Quite the contrary. The tax and its administration has only become more complex. There are clamours once again, including from within the Government, for instance another Ministry which administers certification for startups to drop the clause. I can assure you it will be a miracle if that happens.

The second time is consistency. Indian laws are notorious for veering of course and going either back or sideways.

Tariffs themselves are an indicator.

An Indian Express report quoting economists Shoumitro Chatterjee and Arvind Subramanian, former CEA to the Government points out that since 2014 there have been around 3,200 tariff increases, with the largest increases occurring in 2018.

These tariff increases have meant that the average tariff rate has risen to around 18 per cent, affecting a sizable segment of the country’s trade basket. India’s tariffs are now amongst the highest in the world.

So if you are in any businesses that have been importing raw materials, then your cost of production has risen by that much and you quite likely assumed 8 or 10 years ago that you were dealing with a stable import tariff regime and you had to bother more about prices globally rather than the landed cost.

On the other hand, India has struggled to replace active pharmaceutical ingredients or raw materials for manufacturing critical drugs. We import some 74% of our drug raw materials from China.

There are many other examples of areas where businesses want policy consistency and continuity and I will come back to a few in coming days.

Meanwhile, I can only hope that tax laws will get simpler.

Now onto the stop stories and themes this week.

Markets Last Week

The NSE Nifty 50 hit another record closing high on Friday and also clocked its fifth straight week of gains, its longest such streak this year.

The S&P BSE Sensex also recorded a fifth consecutive week of gains.

Having said that, equity markets settled in the negative zone on Friday, driven down somewhat by HDFC Bank which had an unusually good run in the week before. Reliance Industries was the outlier on the positive side.

The BSE Sensex closed at 79,997, down 53 points while the Nifty50 closed at 24,324, up 21 points or 0.09 per cent.

The BSE MidCap and SmallCap indices hit record highs in the intraday trade, and closed 0.7 per cent higher each.

The Not So Angelic Angel Tax

The angel tax was introduced in 2012 in the form of Section 56 (2) (viib) of the Income Tax Act to plug money laundering practices.

The idea being that the Government can crack down on funds paid to companies as a proxy to funds being paid to an individual who might find it difficult to account for it.

When you pay a company the laws work differently.

So the tax department goes after companies it believes have received investments beyond what they are worth, or the fair value.

The reason it has been called angel tax is because the tax implication was mostly with angel investors, meaning ones who put their money behind startups.

In the last few years, there have been several exemptions and overriding regulations all of which have made a law that was largely ignored for several years, extremely complex and another pain point for younger companies, in this case.

THe latest development is that the Department of Promotion of Industry and Internal Trade or DPIIT has asked the Ministry of Finance to remove the angel tax for startups.

Since it's the SPIRIT which sits under the Ministry of Commerce to whom people go to and cry.

DPIIT secretary Rajesh Kumar Singh confirmed to newspapers on Thursday that the department has called for the removal of angel tax following representations made by the startup community.

However he quickly added that it was only an input from their side and had been done several times.

Hence, this has almost no bearing on whether it will go except to note that some formal letters, one hopes so, may have moved within the Government.

I spoke with Girish Vanvari, Founder of Transaction Square, a tax, regulatory and business advisory firm headquartered in Mumbai and began by asking him a slightly different question.

How could the Government address the issue of money laundering without resorting to the Angel Tax route and then also what he was looking out for from the Union Budget.


The Importance of Store Walkins In Auto Sales

Passenger car sales are slipping after running red hot for several months.

Sales fell 6.7 per cent year on year while overall automotive sales grew less than 1%, over June last year.

Tractors and commercial vehicles did worse.

The Federation of Automobile Dealers Associations (FADA) says the slight growth in overall auto sales was driven by two-wheeler and three-wheeler segments that saw on-year growths of 4.66 percent and 5.1 per cent respectively.

The interesting thing that emerges is that the association says a key reason for sales falling is that store walk-ins have reduced.

Which in turn led me to wonder how important or critical store walk-ins were as far as new vehicle purchases went.

Very critical evidently as FADA President Manish Raj Singhania told me in our conversation where I began by asking him why sales were slower in the last month.


Real Estate Surges

India's NCR and MMR (Mumbai Metropolitan Region) have seen record breaking sales, leading to average residential prices rising by 49% in the last five years and unsold inventory to come down, a note from real estate consulting firm Anarock Research has said.

Latest ANAROCK Research data finds that NCR recorded a 49% five-yearly jump in average residential prices between H1 2019 and H1 2024 – from INR 4,565 per sq. ft. to INR 6,800 per sq. ft.

While in MMR, average residential prices appreciated 48% in the period – from INR 10,610 per sq. ft. in H1 2019 to INR 15,650 per sq. ft. in H1 2024."

This is something, at least in percentage terms you would know if you have been scouring the market in the last few years.

The question of course is will it keep rising.

My sense from conversations is that only in very few pockets, for possibly ultra premium properties. Elsewhere, prices are holding steady at least for buying.

Rents have shot up sharply in the last two years, following a Covid19 dip as landlords have tried to make up for the Covid19 losses.

Those that let out their houses. More than 11 million homes in India are lying vacant.

Travellers Avoid KLM Air France

It's the most unusual if not bizarre aviation-airline story of the year, if not longer.

Air France-KLM has warned of a revenue shortfall at its French operations this summer because passengers are avoiding Paris to skirt possible disruptions and high prices during the Olympic Games, Bloomberg is reporting.

So, you would think an Olympic Games should cause traffic to jump and people to be arriving in droves at any cost.

Maybe they are and will but not by Air France, evidently.

French residents are postponing holidays until after the Olympics, while international customers are staying away, the company said.

Airlines have poured capacity into Paris in the run-up to the games, with Air France, Transavia and Ryanair Holdings Plc leading the charge.

Air France says things will return to normal, which is travel to and from France but that will be only after the Olympics.

It’s seeing “encouraging demand” for the end of August and for September, and won’t pull back on its schedule for now, it said.

While it’s typical for corporate travellers to avoid a host city during the Olympics, Air France-KLM’s warning was “more surprising on an aggregate basis,” Bernstein analyst Alex Irving said in a research note.

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