Ahead of the presentation of the Union Budget on Thursday, benchmark indices like Sensex and Nifty traded firm. This was pretty much in line with the rest of Asia. At around 12.20 pm when the finance minister announced the imposition of the long-term capital gains tax and a dividend distribution tax, share prices slumped.
The market clearly overreacted. Traders realized that it did not make any sense to dump shares in a hurry. At the end of the day, benchmark indices ended flat. From a stock market standpoint, there is no reason to worry. Just like every budget, there is some section of the taxpayer that pays more than the other.
A Union Budget is an accounting exercise. It is about income and expenditure. The biggest worry for most of the market participants was about the fiscal deficit and increase in market borrowing thereafter.
This concern started after a close election in Gujarat. The BJP did not do well in rural Gujarat. There was widespread expectation that the government may focus on enhancing rural expenditure substantially. The government will spend Rs 14,34,000 crore to create employment of 321 crore persons, 3.17 lakh km of rural roads, 51 lakh new rural houses, 1.88 crore toilets and 1.75 crore new household electricity connections besides boosting agriculture growth, said a release.
One would expect the government to have overshot the fiscal deficit target substantially after announcing this spending. The government did overshoot it by 0.1 to 3.3 per cent of GDP than 3.2 per cent estimated earlier.
When the government exceeds the fiscal deficit target, there is a general perception that it would resort to aggressive market borrowing. When governments borrow more than expected from the market, interest rates harden. Hence, most market participants do not like high fiscal deficits.
However, the government has said in the estimates that it would borrow less than the current fiscal. The government has estimated market borrowing at Rs 4,07,000 crore in 2018-19 against Rs 4,79,000 crore in 2017-18.
Credit rating agency Moody’s was quick to react and say that the fiscal deficit target was in line with expectations and they will monitor India’s reforms announced in the budget. The agency had revised India’s credit rating upwards for the first time in 14 years in November last year.
As a stock market investor, you have very little to worry. For share prices to fall, corporate profits have to fall and interest rates and inflation have to rise. Most businesses are likely to benefit from the government’s thrust on spending in the rural market. They will sell more and post better profits next year. The stock market is witnessing an unprecedented inflow from local retail investors. This is creating a cushion against any dramatic sell-off from panic-struck investors.
The growth rates of direct taxes in 2016-17 and 2017-18 have been significant. A growth of 12.6% was recorded last year, and 18.7% till January 2018
New taxpayers numbering 85.51 lakh filed their returns. Effective taxpayers increased to 8.27 lakh crore. No change in personal slab rates
Long term capital gains tax of 10 per cent is proposed for amounts exceeding D1 lakh. Health and Education Cess will be increased to four per cent
FM Arun Jaitley proposes 100% deduction to farmer-producer companies having a D100 crore turnover
Founder-MD, Simplus Information Services