Budget Expectations: Equity Markets

27 Jan 2022 , 10:50 AM

One segment of the economy that eagerly looks forward to the Union Budget each year is the equity market. Be it analysts, dealers, investors or fund managers; the Union Budget normally has a larger-than-life impact on capital markets. The impact is both; direct and indirect. Each year, the market is rife with expectations and it is no different ahead of Union Budget 2022-23.

Here are some key expectations of equity markets from the Union Budget.

1) Cut long-term capital gains tax on equities to zero

When securities transaction tax (STT) was introduced in the Union Budget 2004, the tacit understanding was that it was introduced in lieu of LTCG. That was the case till 2018, when LTCG on equities was introduced in addition to STT. This effectively amounts to double-taxation. More importantly, 10% flat LTCG tax on equities above Rs1 lakh per year also applies to equity funds with implications for long-term financial planning. It is hoped that the LTCG on equities would be scrapped in Union Budget 2022-23.

2) Scrapping or reduction in dividend tax

Currently, dividends on equities and equity funds are being taxed at the peak rate. The actual cost to investors is a lot higher as dividends are already a post-tax appropriation. This was introduced in 2019 replacing dividend distribution tax (DDT), but the cascading impact is quite large. The budget expectation is that dividend tax is either scrapped or at least the rates are reduced to a more palatable level of 10%.

3) Elimination of securities transaction tax (STT)

Over the years, FPIs have remonstrated that the cost of trading is too high in India and STT is one of the main reasons. It is expected that scrapping of STT would further improve volumes in equity markets. However, empirical experience has been that Indian stock market volumes have grown exponentially after introduction of STT. Also, STT contributes nearly $2 billion each year and looks unlikely to go away.

4) More disposable incomes in the hands of people

One of the keys to giving a boost to equity markets is by putting more disposable income in the hands of people. This can be done by cutting GST on items of mass consumption. It can also be done by reducing rates of personal taxes or offering higher exemptions. Equity markets would be really flattered if the Union Budget announces a game plan to keep the inflation impact in check. After all, inflation does the most damage to purchasing power.

5) FPIs expect fiscal prudence, or at least fiscal timetable

foreign investors have been wary of Indian markets due to its vulnerability to high levels of fiscal deficit. It was 9.4% in FY21, estimated at 6.8% in FY22 and possibly 6.5% in FY23. COVID has put pressure on the fiscal deficit, and this is a global phenomenon. What foreign investors expect is a clear time-table to bring fiscal deficit back to 3.5% levels. That should be good enough!

6) More execution on disinvestment and strategic sale

India fell way short of its divestment targets in FY21 and it will repeat in FY22 if LIC IPO does not happen this fiscal. Focus for FY23 will be on execution. Investors now want to see real action on disinvestments and strategic sale. The government may be sitting on a gold mine, but cases like BPCL and LIC have taken too long. Evidence of execution is also expected in areas like National Monetization Plan, PLI schemes etc.

7) Counter-cyclical boost will have to sustain

Even as fiscal deficit will continue to be a deciding factor, the investors don’t want the government to give up on massive fiscal push in the form of infrastructure investments and PLI incentives to catalyse growth. Budget 2022 has to explore more innovative ways of monetizing assets and raising funds, apart from public-private partnerships. Paradoxical as it may sound, there cannot be a let-up on counter-cyclical thrust to the economy.

8) Support to valuation boosters in stock markets

One trend in the stock markets in last couple of year has been that valuations are most favourable in futuristic business segments like green energy, digital shift, electrical vehicles etc. A lot will depend on how the government sustains its support to these valuation accretion stories in Union Budget 2022.

9) Time to articulate support to contact-intensive 4T sectors

If you look at the preliminary GDP estimates, the sectors that are still way below the pre-COVID levels of output are trade, transport, travel and tourism (4T). Union Budget 2022 must look at these 4T sectors. These are not only job-intensive sectors but also have strong externalities for economic growth. Unless these sectors pick up to pre-COVID levels, overall growth may still face resistance. The time is ripe for a full-fledged 4T action plan.

10) Start-ups plus IPO markets to drive capital market growth

That is the secret formula. India has seen the emergence of several Unicorns and even Decacorns in the last few years. The big challenge is to give them a path to equity markets. For the Indian start-ups to emerge as value creators, they need a clear capital market strategy. Budget can enable this by SPACs or any other special method. That will be the key.
There is a mountain of hope that equity markets have built up ahead of the Union Budget. Hopefully, Budget 2022 will address most of these expectations.