Why the stock market corrected sharply post the budget? There were no clear measures to boot consumption spending as was made apparent in the Economic Survey. That push was lacking. For example the tax slabs remained the same. Even the expected increase in the basic income tax exemption slab from Rs 2.5 lakh to Rs 3 lakh hasn’t come about. There were hopes that the tax rebate would be replaced with a tax exemption up to Rs.5 lakhs but even that did not come about. HNIs who are major swing investors in the market were victims of a sharp increase in income tax rates for the rich and wealthy. This could have implications for spending on premium products and services. The decision to tax buybacks on par with dividends at the rate of 20% also did not godown well with the markets. For example, the markets were looking at buybacks by IT companies with tons of cash to reward shareholders. That is not viable any longer. That is why IT companies were among the major losers. The real bugbear was the proposal to push SEBI to consider a higher public shareholding limit of 35 per cent, as against the current 25% for listed companies. Markets are worried that this could unleash fresh supply of shares into the equity markets, by way of follow-on public offers by companies with high promoter holdings. The higher divestment target of Rs.105,000 crore combined with the decision to bring PSU stake to below the 51% mark will also add to the supply in the market. Ironically, the proposal restricting the corporate tax rate cut only to companies with a turnover of up to Rs 400 crore is perhaps a disappointment to the markets too. A quick calculation on NSE-listed companies shows that two-thirds of these companies will not be eligible for the benefit as they clock consolidated sales of over Rs 400 crore. Instead of doing away with the Long Term Capital Gains Tax or Dividend Distribution Tax, the Budget has added new taxes in the form of buyback taxes. The budget hardly offered a solution to the NBFC crisis. The credit line of Rs.1 trillion will only be available to the strong NBFCs. These NBFCs hardly require nay funding support. Similarly, bringing the HFCs under the RBI regulation is going to put stringent restrictions on their growth and they may not be able to make the best of the opportunities thrown open by the push to low cost housing. But there were some key positives too for the equity markets The good news is that most of these are either just proposals or are not likely to fundamentally change the valuations of the companies on hand. For example, higher public shareholding is just a proposal and buyback tax is just the removal of a tax arbitrage. Also the push to MSMEs and EVs are likely to be long term positives. At the same time, the promised splurge on infrastructure building both in rural and urban India, the recapitalisation and promise to dilute Government stakes in public sector banks are long-term positives for equity markets in the long run. Also, with the FPIs and NRIs getting more room to participate in the Indian markets, sky is the limit. Another positive sidelight was the impact on the bond markets, Compared to the stock markets, the bond markets were actually happy with the budget decision to rely on offshore borrowings to fund its sizeable deficit. This will stop the crowding out of private fund raising in the Indian markets and help the corporates to borrow at ease. That explains why the 10-year government bond yield fell below 6.7% in the aftermath of the budget. Most market players may be taking a very myopic approach to the equity markets. There are sufficient long term triggers in the market to drive equity valuations higher. As rural India gradually benefits and social net expands, it is time to look at the equity markets from a longer term perspective.
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