No other segment of the economy looks forward to the budget announcement with greater optimism and greater trepidation than the capital markets. Market participants usually expect a mix of macro and micro initiatives to boost the capital markets. So, what exactly are the markets expecting from Union Budget 2019 next month?
Let us look at the 10 things that the capital markets are expecting from Budget 2019:
1. Macro stability needs to be achieved in the form of lower inflation and a restraint on fiscal deficit. Taking liberties with the FRBM targets hints at the lack of fiscal discipline, which usually does not go down well with global investors.
2. Nirmala Sitharaman has promised to revive the animal spirits of capitalism, which is a must if GDP and IIP growth have to revive. It could be fiscal or monetary incentives, but the bottom-line is that the budget will hope for lower real rates of interest.
3. The markets also expect the corporate tax rate to reduce from the current rate of 30%. The rate cut was promised by Jaitley in 2014 but was restricted to companies with an annual turnover of less than Rs250cr. It is time to move corporate tax rates and the MAT rates down proportionately.
4. Although the interim budget gave considerable income tax relief to the middle class, an expansion of the Rs150,000 limit for Section 80C is long overdue as it is really out of sync with the times. It is time to expand the limit and also to permit more equity-related products into the Section 80C ambit, apart from ELSS.
5. The introduction of LTCG tax on equities and equity funds goes against the basic 2004 commitment that STT was introduced in lieu of LTCG. Imposing LTCG on top of STT discourages retail participation in the markets. The budget can make a beginning by exempting equity mutual funds from the LTCG tax as it is a critical tool of financial planning for most Indian households.
6. Taxation of dividends is another debatable issue. Currently, dividends are taxed at 3 levels. First, it is a post-tax appropriation. Second, it is subject to DDT. Finally, HNIs pay 10% tax on dividends over Rs10 lakh per year. This multi-level taxation has to go, especially the DDT on equity mutual funds, to reduce the burden on retail investors.
7. The one sector that is likely to drive domestic growth in the capital markets is housing. The NBFCs with solvency issues must be separated from the NBFCs with liquidity issues, and the RBI liquidity window must be restricted to the latter group only. This will ensure that the contagion effect of NBFCs is limited, and housing does not suffer.
8. Banking NPAs are the big overhang for capital markets as financials account for 38% of the Nifty index. The big challenge for the budget is to deal with the second-level NPAs without fixed assets (Jet/IL&FS/DHFL, etc.). This can neutralize the good work of NCLT-1.
9. The budget has to, once and for all, put an end to the ambiguous areas of taxation with reference to FPIs. Cases such as Cairn India and Vodafone have been pending for too long, and most FPIs are unhappy. The budget must provide clarity on this issue to sustain FPI interest.
10. Finally, the budget cannot relent on infrastructure push as infra is what creates the ideal ecosystem for a spurt in GDP growth and exports. The budget must design and adhere to a detailed plan for its proposed $2tn investment in infrastructure over the next 10 years.
Union Budget 2019 will be presented by a government that has received a resounding comeback mandate. It is time to be make tough decisions at a time when the economy really needs it and give a boost to capital markets.