How the Union Budget 2019 changed the market undertone?
Let us start with a caveat here. An economy that is likely to grow at 7% and poised to boost its GDP from $2.9 trillion to $5 trillion in 6 years has to be a good equity story. Then where did the budget really disappoint the markets?
- The first disappointment came on the corporate tax front. There were strong expectations that the budget would cut corporate tax rates to 25%. After all, Arun Jaitley had promised this way back in 2014. But all the budget did was to increase the threshold for 25% tax rates from Rs250cr to Rs400cr. That means the heavyweights on the Nifty will continue pay 30% tax.
- The Budget 2019 imposed 20% tax on buybacks on the difference between the buyback price and the issue price. This was intended to plug the loophole with respect to dividend distribution tax (DDT). In the process, this tax may put a steep cost on investors who invested recently. It is also likely to dissuade most companies from buyback plans.
- The proposal to increase the public shareholding from 25% to 35% may be a good step on paper. But it would mean a huge supply of paper in the market. Add to that, the decision in the budget to sell majority stakes in a host of PSUs. There could be a huge overhang of paper in the market and it could be a case of too much paper chasing too little money. That is a recipe for pressure on valuations.
- The Budget also imposed a higher surcharge of 25% on incomes above Rs2cr and 37% on incomes above Rs5cr. This higher surcharge on higher income groups (super rich as the FM called) looked like an innocuous attempt to squeeze Peter to pay Paul. But there was more to it. The budget had added a clause that this would also apply to association of persons (AOPs) and to trusts. That is where the problem arises. Nearly 40% of the foreign portfolio investors (FPIs) in India are structured as trusts. All of them would end up paying steeply higher taxes. The sharp selling by FPIs in the aftermath of the Budget 2019 is, therefore, hardly surprising.
- Finally, the markets were expecting a solution to the problem of stressed NBFCs. However, the line of credit promised for NBFCs was reserved only for fundamentally sound NBFCs. That leaves out the stressed NBFCs in the market who are currently facing a solvency crisis. From the stock market perspective, that hardly solves the problem.
But there is room for optimism too
While the concerns post the budget are absolutely genuine, there is room for optimism too. The government has attempted to largely liberalize the FDI regime and has given a boost for NRI inflows in Indian markets. The bank recapitalization allocation of Rs70,000cr will ignite the engines of growth. Perhaps, the good things are likely to happen over a longer time frame. It is just that the Nifty and Sensex are notorious for being impatient!