The stock markets really don’t have much to complain about because optically they are quite close to their peaks. Despite the weakness in the macroeconomic numbers, the markets are still robust because there are big reformist expectations in the stock market. The markets are hoping that the budget will seriously usher in some big bang reforms and also look to tweak some of the critical parameters in order to give a boost to the markets. Here are ten such expectations for capital markets from the Union Budget 2020. 10 key expectations of capital markets from the Union Budget 2020 The stock markets need a reforms push and a growth story to justify the current valuations. Here is what the markets are actually expecting. 1) The markets are looking for a big boost to infrastructure. The government has spoke of an overall outlay of $1 trillion for infrastructure in the next 10 years. The trickle-down effect of such infrastructure investments will be big enough to boost the stock markets from the current levels. 2) There is a real demand push needed from the consumer perspective to put more money into the hands of the retail consumer. This could come in the form of higher tax slabs, lower tax rates or even in the form of more exemptions under Section 80C. This can be a twin booster to growth. 3) Housing has traditionally been a major driver of stock markets due to its downstream effects. For example, there is expectation of an increase in the limit under Section 24 of the Income Tax Act. There are also expectations that the special incentive for new homes will be extended beyond low cost homes to be more effective. 4) Of course, scrapping of long term capital gains tax has to be on the budget agenda. It will make a big difference to the mass of retail savers and investors who are relying heavily on the power of equity mutual funds to create wealth in the long run. Scrapping tax on LTCG will actually hit two birds with one stone. 5) Next on the agenda should be the scrapping of the tax on dividends and buybacks in the hands of the investors. Dividends are already subjected to tax at multiple levels and buybacks are genuine way of rewarding shareholders. Withdrawal of these cascading taxes will go a long way in assuaging the market sentiments. 6) Rural demand can have a multiplier effect on a number of companies ranging from FMCG to tractors to four wheelers. In the last few quarters, it is rural demand that has been extremely weak and tepid. From being the driver of FMCG and auto growth rural India has shifted to being a drag. The budget calls for greater rural spending, employment guarantee programs and higher income for farmers. 7) Sounds tough on paper, but if the Budget 2020 is serious about the capital markets then the fiscal deficit has to be kept under control. The 3.8% leeway need not be utilized just because it is available. Lower fiscal deficit is positive for ratings and the bond yields and both are positive for equity market sentiments in India. 8) There have been too many regulatory uncertainties in the last few years; retrospective taxation being only one of them. From Vodafone to Nokia to Cairn, the legal cases have been cumbersome and have created roadblocks to foreign capital flows into India. The government must use the budget as a platform to assuage the fears of the foreign investors and also given comfort about the robustness of the Indian markets. 9) The Indian investors are taking to mutual funds like a fish to water. The government has seen the power of CPSE ETFs in the divestment process. It is time to give special incentives for mutual funds as an asset class. The ELSS can be given a dedicated limit, debt funds can also be offered tax breaks, given special LTCG and DDT tax rates for mutual funds and bring MF pension plans on par with NPS. Impact could be catalytic. 10) Keep the rupee stable. One of the key elements of equity market robustness is FPI flows and that is a function of a stable to strong rupee. The government need not strengthen the rupee but with a forex chest of $465 billion, the government can have an institutional mechanism to keep the rupee in a range. Will free convertibility help; that is something the budget could explore. It could be drastic but surely makes sense. The equity market rally has been hinging on positive cues from the Union Budget. It is time for the FM to deliver.
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