BUDGET EXPECTATIONS : EQUITY MARKETS

21 Jan 2023 , 08:49 AM

Broadly, the equity markets gets 3 types of boosts. First is the boost from the macro variables that favour a robust stock market. The second is the market infrastructure that has a more micro implication. Lastly, there are the tax related changes that can markets more attractive from the investor’s perspective. Clearly, Union Budget will look at a combination of these troika of measures to boost the equity markets. Let us look at these 3 categories and then the granular needs of each of these segments of the capital markets.

MACRO LEVEL CHANGES TO BOOST EQUITY MARKETS

Here the Budget can focus on several areas like putting more money in the hands of the people, boosting consumption so downstream industries can benefit, keeping the macros in check so that the institutional investors find the markets attractive and also on the policy front, the question is what can the government do to put quality paper in the stock markets. 

How to improve purchasing and investing power

The simplest and the most intuitive way to boost markets is to put more money in the hands of the people. How exactly can this be achieved? There are a number of ways. Firstly, a cut in GST rates on items of mass consumption can do a lot wonders to the household budgets. The best way is to cut the rates of income tax, which can be done at two levels. For people in the entry level, the best way would be to enhance the tax brackets and make income up to Rs5 lakhs totally tax free. 

Additional exemptions like a higher limit of standard deduction (raised from Rs50,000 to Rs100,000) or by expanding the ambit of Section 80C and Section 24 for homes can go a long way. The second method is to focus on the higher income tax brackets. These people pay around 44% of peak tax rates and that is too high even by conservative standards. The government can look to streamline the income tax rates to reduce the tax rates progressively for the high income groups. That can automatically bring a lot more money into the stock markets. 

Look at multiple ways to entice the FPIs

It is very simplistic to say that FPI flows are cyclical and cannot be controlled. While global factors do play a role, there is a lot that can be done domestically. For example, when the government cut the tax rates for corporates to 15%, there was a surge in FPI interest in the stock markets. Secondly, the onboarding process for Foreign Portfolio Investors (FPIs) can be made simple and single-form based. 

There is still too much bureaucracy involved. The budget must adopt a push strategy to attract FPIs. Lastly, Budget 2023-24 must proactive give comfort to FPIs on the retrospective tax front. The issue is yet to be fully settled and a comfort level from the government that no retrospective cases will be taken up can go a long way in assuaging these global investors.

Quality paper in the market through divestments

In the last two years, the government has become too conservative on divestment targets. The government had missed divestment targets for two years and it is playing it safe. That is not the answer. Disinvestment brings quality PSU paper into the market and ensures that you don’t run the risk of too much money chasing limited paper. 

Government must present a detailed time table for divestment and for strategic sale in this budget. In FY23, the divestment target depended too much on LIC and that is not going to the case in FY24. The Budget 2023-24 has to be a lot more proactive on this front. 

Fiscal incentives should be countercyclical

There are two aspects here to boost the equity markets. Firstly, the fiscal deficit must be sharply and perceptibly lower in FY24. A lowering of fiscal deficit from 6.4% to 5.8% would be welcomed by global investors and by rating agencies. Even as fiscal deficit will continue to be a deciding factor, the global investors don’t want the government to give up on massive fiscal push. This would include measures like the infrastructure investments and PLI incentives to catalyse growth. 

To meet its revenue targets and reduce the fiscal deficit this year, the focus must be on monetizing assets and raising funds, apart from public-private partnerships. Even as the RBI continues to remain hawkish to manage inflation expectations, the fiscal policy outlined in the budget must still be growth oriented. That is the need of the hour to boost markets, since India $5 trillion GDP is the biggest narrative for stock markets.

 

MARKET INFRASTRUCTURE CHANGES TO BOOST EQUITIES

The current union budget can dwell broadly on two areas to boost the equity markets. The first pertains to critical valuation boosters to the market while the second pertains to reviving the IPO market or the initial public offer market. Both these moves can be largely value accretive in giving a boost to the equity markets and the level of interest that investors show in stocks.

Identify value drivers and give a fiscal boost

There are two trends seen in the equity markets in the last few years. First, lot of value creation has gravitated towards new generation ideas like green energy, digital shift, electrical vehicles, renewable equipment, green ecosystem, data centres etc. Secondly, the government can direct fiscal incentives to such segments, including specific tax breaks. The Production Linked Incentive (PLI) scheme is a classic example of directing action to high growth sectors and critical sectors. For example, PLI in defence and PLI in textiles have been largely responsible for making these segments attractive from a value creation perspective.

How about special incentives for key IPO pockets?

India has seen the emergence of several Unicorns and even Decacorns in the last few years. However, the digital plays are languishing after their sustained losses, huge cash burn and value depletion in the post listing period. The government can offer special incentives in the budget for IPOs so that the primary market can be revived. For instance, IPO investments can be offered a special time-bound tax break. In addition, the success of IPOs depends on the proliferation of demat accounts. The government must the IPO and equity cult by offering something similar to zero-balance accounts in banks. The budget can also make provisions for a small subsidy to cover cost gaps. This can have a multiplier impact on the IPO markets.

INVESTOR LEVEL CHANGES TO BOOST EQUITY MARKETS

These are very micro level changes on the tax tweaking front to make equity investing more attractive for equity investors. Here are some of the measures that can be envisaged.

Firstly, it is time to cut long term capital gains tax on equities to zero. When securities transaction tax (STT) was introduced in Budget 2004, the understanding was that it was introduced in lieu of LTCG. However, post 2018, investors have been charged STT and LTCG tax, which becomes double taxation. Not to forget that dividends are also fully taxed in the hands of the investors. It is time to scrap LTCG tax and dividend tax in the hands of the investor. From a practical perspective, STT is unlikely to be scrapped due to its $3 billion revenue potential annually. Hopefully, the Union Budget architects are listening.