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What are the stock markets expecting from the Union Budget?

05 Jan 2023

One of the key areas of interest for stock market traders and investors is the implications of the Union Budget for the stock markets. Stock markets broadly expect three things; a stable macro environment, a conducive atmosphere for markets and a favourable taxation policy. Here are some key expectations that stock markets have from the budget.

Keep fiscal deficit in check; don’t let it spiral
This is one area where investors have traditionally hoped for some conservatism. Back in 2016, the bull market was triggered by the Union Budget after it chose to focus on fiscal discipline despite the pressures to spend in the budget. Fiscal deficit in control is critical because that is viewed positively by global investors as well as by the rating agencies. Global investors prefer to invest in economies where fiscal deficit is kept in check and even the total government borrowings as percentage of GDP is controlled. This could be a big challenge in this budget considering the pressures. However, if the government can give a clear indication that the fiscal slippage is temporary and is intended at boosting growth, markets should be substantially pleased.

Use disinvestment program to infuse quality paper into markets
One of the challenges for a growing economy like India is that fund flows are likely to make the market stretched in valuation terms. The only solution is to ensure that there is a constant supply of quality paper into the market. With the markets tepid in the last one year, there is again a case of too much money chasing limited paper. That explains why high quality stocks are again getting stretched in valuation terms. Disinvestment can resolve the problem. By combining stake sale in PSUs with strategic sale and monetizing government assets through the market route, the government can substantially expand the supply of quality paper in the market. That can go a long way in giving people choice and also taming stretched valuations in the market.

Reduce the incidence of taxation on capital gains
The markets have been saying this for a long time that the levels of taxation on market transactions are just too many. Take the case of capital gains on equity. Firstly, STT was introduced in lieu of long term capital gains tax. Therefore introducing tax on LTCG on equities and continuing with STT becomes a dual tax on the investors. In addition, the third level of tax comes from the flat tax on long term gains, which means that the benefit of indexation will not be available. This becomes a big hit as far as long term financial planning is concerned. Investors are expecting that, at least, the benefit of indexation be reintroduced for equity gains or the rate of taxation is reduced to just 5%. In fact, the expectation is that if the revenues are not substantial this year, then the government may choose to do away with LTCG tax altogether.

Reduce the cascading effect of taxation on dividends
This is one more area of concern for the Indian equity investors. Today dividends are being taxed at multiple levels. Firstly, dividends are a post tax appropriation which means the tax benefit is not available for the company paying dividends. Secondly, there is dividend distribution tax that is imposed at 15% of the gross dividends paid by the company. This also proportionately reduces the net dividends in the hands of the investor. Thirdly, Union Budget 2016 had introduced a 10% tax on dividends in the hands of the recipient if the dividend exceeded Rs.10 lakhs per year from all holdings. Lastly, but not the least, the Union Budget 2018 had introduced the DDT on equity MF dividends too. For MF investors this really cascades to a very high level of multi-taxation when they opt for the dividend plan.

Special exemption for equity investments
Today the only benefit that investors get on equities is the Section 80C benefit available on ELSS investments. For a country that is still low on equity cult and has a big army of young people entering the job market, equity needs a big push. The Rajiv Gandhi scheme for first time equity investors fell short of expectations and has hardly taken off. What the government can do is to give flat incentives on IPO investments and it can begin with PSU IPOs. It will not only create demand for these IPOs but also incentivize participation in the equity markets at an early stage. Putting more money in the hands of the people is only one step. The real focus has to be on giving them productive avenues to put the money.

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