Budget Expectations: Why equity markets want a brave budget

16 Jan 2024 , 09:28 AM

EXPECTATIONS ARE LOW FROM THE INTERIM BUDGET

To begin with, the expectations are quite moderate from this budget. Coming just ahead of the General Elections, this budget could at best be a stop gap arrangement. Hence the expectations are moderate. However, people may be in for a surprise as the government could use the goodwill from recent state elections to make an aggressive statement on reforms. Those who remember the 2019 interim budget would agree that it was anything but interim. It was presented like a full-fledged budget. When the NDA came back to power in 2019, the actual budget in July largely ratified the interim budget. Hence, one can expect that the finance minister will take this budget very seriously and treat it like a normal full budget. In that case, expectations should be much higher!

Any note on budget expectations begins with expectations of the equity markets. In last one year, the Nifty and Sensex were up 20% and as we go into budget season, both the indices are at life-time highs. The expectations from the Union Budget can be classified into 4 segments. The first set of expectations pertain to the macro level expectations that will boost the capital markets. The second set of expectations pertain to corporate and micro level measures expected. Thirdly, it boils down to participation by retail investors and how tax tweaks can help. Finally, we focus on whether the budget can make any announcements to give a boost to consumer demand in India. That is a big driver of equity markets.

1. MACRO EXPECTATIONS OF EQUITY MARKETS FROM BUDGET 2024-25

There are some key expectations that equity markets have and while these macros don’t directly boost equity markets; many of them have long term repercussions. Here are some key expectations from Budget 2024-25.

• The first expectation is on capital expenditure or capex spending by the government. In the previous budget, the capex grew by 30% year-on-year; a record capex growth yoy. Also, last year, the capex outlay was over 20% of the total budget outlay; the highest capex ratio achieved in any budget post liberalization. High capex support by the government has been instrumental in reviving the capex cycle, as is evident from the order books of capital goods companies. This year, the expectation is not just to sustain the trend, but to accelerate the capex to offset global growth concerns.

   

• A related topic is of infrastructure investments. The government has made record allocations of Rs8-9 trillion for infrastructure in recent budgets. Much of that has gone into roads and railways. The current budget expects that growth to be accelerated. It also expects government to invest in other infrastructure that are conducive to growth of broadband, digital India, EVs, green hydrogen etc. These are the futuristic industries.

   

• Fiscal prudence will still hold the key. Last year the Budget had brought down the fiscal deficit to 5.9% of GDP, sharply lower from the COVID highs. However, it needs to stick to its commitment of fiscal deficit at 4.5% of GDP by FY26. That means; the fiscal deficit for Budget 2024-25 presented on February 01, 2024 must be 5.2% or thereabouts. That will ensure a proper glide path towards 4.5% fiscal deficit by FY26. This year, government is likely to meet its target or even better it. However, next fiscal will have challenges like slowing nominal growth and global uncertainty. Lower glide path of fiscal deficit is positive for FPI flows and global ratings.

   

• The divestment program appears to be meandering aimlessly and the government must use this budget to put things in shape. This year, the disinvestment target was just about Rs65,000 crore and even that is likely to fall short. This year saw a huge dividend from the RBI, so the government had little incentive to push the divestment story. Also, the divestment of BPCL and IDBI Bank are in cold storage. The government must now stick to a time table and expand this piece. The National Monetization Plan has been focused only on road assets and needs to go beyond that. The strategic sale story is also lagging. Disinvestments bring in private interest; but also induce quality paper in the market.

   

• Finally, there is the missing link of investing in soft infrastructure. That includes investments in primary education, quality institutions, primary healthcare, coverage for all etc. These may look like peripheral issues, but India lags behind Asian peers when it comes to investment in education and primary health. These factors impact growth and the quality of growth will be a multiplier effect. It is high time; the budget devotes adequate time and resources to the twin aspects of education and health in India.

The basic push always comes from the top and that is all about the right macro environment. The budget has to send out the right message to the capital markets.

2. BUSINESS EXPECTATIONS OF EQUITY MARKETS FROM BUDGET 2024-25

Having looked at the macros, there are some distinct expectations from the Union Budget 2024-25 in terms of how it tweaks incentives to corporates and handles the business environment. Here are some key expectations.

• This is the budget that will have to hit two birds with one stone. Here is how. Exports of goods this year are likely to be lower by about $30 to $35 billion due to the evolving Red Sea crisis. India relies heavily on the Suez Canal for its trade with the West and that route is under attack. That has hit India’s trade. Union Budget is expected to announce a slew of incentives and special benefits to merchandise exporters to help them overcome the loss of business. The budget incentives must also focus to help them access new markets and enable lower costs with government guarantees. In India, the MSME sector accounts for about 45-50% of the total exports going out of India, so any export boosting scheme has to be an incentive scheme for the MSMEs too. This has to be top priority.

   

• While boosting exports is one side of the PLI (production linked incentives) story, the other side is to play the role of import substitution. Amidst falling exports, import substitution assumes importance to ensure that the trade deficit does not get knocked out of shape. One way would be to extend the PLI scheme to many more sectors with focus on most of the emerging sectors where India already has a production advantage.

   

• Ease of doing business for global investors and for businesses has been talked about for quite some time. However, as we have seen in the case of Tesla and many others, interested companies are still waiting for a long time. No doubt, the government cannot accede to every demand, but there must be a mechanism of ensuring that India does not lose out on this narrative. The China Plus One requirement has come as a blessing in disguise. Big names like Apple have made a decisive shift towards India and there are more coming. However, for the trickle to become a flood, the Budget must define a more comprehensive clearance window for such projects. It has to happen right now.

   

• In the coming quarters, a lot of action is expected in emerging sectors like artificial intelligence, machine learning, IOT, genome sequencing, green hydrogen, lithium ion cells etc. These are high tech industries and require a high level of business sophistication. Also, there is a huge scope in India, given the right environment. The government must use this budget to work out a package for such sectors with larger long term repercussions on the Indian economy.  The impact would be a multiplier impact as far as growth and the capital markets are concerned.

This has been one gap in the previous budgets. India can no longer afford to lose out to other markets due to delays in decision making or rigidity. That is what has to change.

3. TAXATION EXPECTATIONS OF EQUITY MARKETS FROM BUDGET 2024-25

A lot of the equity market expectations are about taxes because, at the end of the day, it is the post-tax returns that matter. We are not putting down reduction or scrapping of STT in our list of expectations. STT generates Rs32,000 crore in revenues in a year and the government will not give it up easily. Here are some key tax related expectations.

• Capital gains tax reduction, especially on long term capital gains has been a long standing demand. Today LTCG on equities is taxed at 10% after the base incentive of Rs1 lakh of gains. What the budget can do is to split LTCG into two parts. The LTCG from 1 years to 3 years holdings can still be taxed. However, any holding beyond 3 years should be kept LTCG tax free. This will be an incentive for long term investments in equity and equity funds for investors. More so, since financial planning is picking up traction.

   

• The strain of tax on dividends at multiple levels is still a major issue. The government can at least look to exempt mutual fund dividends from peak tax and tax them at a concessional rate. That will help investors who rely on such dividends for regular income. Also, dividends are a post-tax appropriation. Hence taxing the dividends at peak rate, actually boils down to double taxation. The best the government can do is to offer concessional rate of tax on dividend income.

   

• With the launch of the new tax regime (NTR) from this fiscal year, the focus on incentives for investing is gone. The impact is evident in the sharp slowdown in ELSS investments in the latest year. The government can retain a lower limit even in the new tax regime so that there is an automatic incentive for people to create wealth. This can be a big boost to long term wealth creation for individuals.

Major tax changes are unlikely in this budget, being an interim budget. However, if 2019 is any guide, the government may be willing to present a proper full budget this time also.

4. CONSUMER DEMAND EXPECTATIONS OF EQUITY MARKETS FROM BUDGET 2024-25

One of the most exciting phases for stock markets is when the capex is building and consumer spending is also on an uptrend. Here is what the budget is expected to do to boost consumer spending in the coming year.

• Sectors like tractors, two-wheelers, FMCG products are all substantially rural demand driven. While the budget cannot directly boost sales, it can do so indirectly. For instance, gainful employment schemes in rural areas, higher MSP for farmers and larger projects in rural areas can translate into higher rural income levels. That will automatically translate into rural demand; since the propensity to consume is a lot higher. The impact on sectors like FMCG, automobiles and food products would be huge.

   

• What about GST tweaks? One can argue that GST tweaks happen in the GST Council meet and not in the Union Budget. But, the tone can be set in the Budget. For instance, rising inflation is a big concern this year and the government can use the GST rate on essentials to offset this impact. The shortfall in collections can be made up through tighter compliance through the use of technology.

   

• One way to boost demand is to put more money in the hands of people. That includes raising the tax exemption slabs, reducing the rates for various slabs. Even if revenues are hit, the incremental impact on consumption would more than make up for that. That may not happen in the February budget, but something worth a try.

   

• Finally, one thing the Budget should look to boost the economy; is a housing push. The home loan process has to be made more accessible and costs need to be lowered. Government can offer special subsidies across; not just for low cost housing. There is a vast middle segment with housing demand, but not having the right avenues. That is what the government must tap. It can have a multiplier impact on consumption.

At the end of the day, this is still going to be an interim budget. However, this government has shown the courage in 2019 to not wait till the elections. The economy and stock markets will really welcome a brave budget at this juncture.