Exchange traded funds tracking India, Asia's third-largest
economy, are getting crushed Thursday after the government there
unveiled surprise spending increases ahead of next year's
elections. Indian government expenditures will surge 16 percent
for the 2013/14 fiscal year to $309 billion,
On the heels of a slack fourth-quarter GDP report and with
dealing with a tenuous grip on its
investment-grade credit rating
, economists and investors expected more of a commitment to
spending cuts from Finance Minister P. Chidambaram, not spending
India's GDP grew at 4.5 percent in the fourth quarter, the
slowest pace of growth in almost four years.
are showing an adverse reaction to Chidambaram's spending plans
as the WisdomTree India Earnings ETF (NYSE:
) is down 3.2 percent today. The PowerShares India Portfolio
) is lower by 3.3 percent while the iShares S&P India Nifty
50 Index (NASDAQ:
) is off 3.1 percent.
Noteworthy is the fact that Fitch Ratings and Standard &
Poor's have said that India's new budget will not prompt a
sovereign debt downgrade. The two ratings agency have previously
said India's investment-grade rating could be in danger unless
the government gets a better hold of its finances. At BBB- on the
S&P scale, India's credit rating is the lowest in
investment-grade territory and the lowest among the four BRIC
Chidambaram, widely viewed as a possible candidate for prime
minister next year, disappointed investors by rolling out a
budget that does not deliver a much anticipated cut in
withholding taxes for debt investments, Reuters reported.
Last last year, India unveiled a series of reforms aimed at
boosting foreign investment, news that helped buoy the late-year
fortunes of EPI, PIN and other India ETFs. However, the country
also proposed General Anti-Avoidance Regulations (GAAR) earlier
in the year, casting a pall over Indian stocks.
There has been some talk of deferring GAAR, which could be a
near-term positive for Indian equities. GAAR's implementation
could be delayed for up to three years
so that companies with tax residency in Mauritius are not overly
However, markets apparently wanted more out of the Chidambaram
regarding avenues to increase foreign direct investment.
Increased government spending ahead of national elections is
not a new theme. Investors and voters have seen it in the U.S.
decades and the emerging world has taken a page from the U.S.
playbook. Last year, Malaysia unveiled
a massive spending program ahead of this year
though that has done little to support the iShares MSCI Malaysia
ETF in 2013.
Spending is not the only issue. Chidambaram is looking to
impose new taxes on large companies to boost revenue rather than
reduce spending. That could be a negative catalyst for EPI, PIN
and INDY because those ETFs are heavily focused on Indian
That said, small-caps ETFs are reacting even more poorly to
the news. Already the 2013 laggards of the India ETF lot, the
Market Vectors India Small-Cap ETF (NYSE:
) and the EGShares India Small-Cap ETF (NYSE:
) are both lower by more than five percent today.
For more on ETFs, click
(c) 2013 Benzinga.com. Benzinga does not provide investment
advice. All rights reserved.
Profit with More New & Research
. Gain access to a streaming platform with all the information
you need to invest better today.
Click here to start your 14 Day Trial of Benzinga