The budget this year, as expected, is a populist budget. It is a budget for Bharat, huge allocations to boost rural economy. But taking about the impact on stock markets, there were huge ups and downs in the Sensex. Investors started on an optimist note, then saw red, and again were at ease and then again there was selling pressure. The negative for the market was the long-term capital gains tax (LTCG). In a very complicated process treating January 31 as valuation date, a 10 per cent capital gains will be levied for shares. Thus, there is no panic to sell tax-free and there is a 6-month window. The gains up to Rs 1 lakh will be tax-free. Thereafter, all sales and purchases held for more than one year would be subject to 10 per cent LTCG. There was no announcement for removing of securities transaction tax (STT). This tax was brought in lieu of LTCG; now LTCG is restored but STT continues.
Similarly, dividends from equity mutual funds will also now be a subject to tax. Retail investors had joined the markets in a tax-free regime, braving tedious KYC, CKYC, FATCA declarations and the latest being Aadhar identifications, are now let down.
The process of calculating LTCG will be very tedious for all investors. The collection expected is Rs 20,000 crore. The same amount can be collected from the market by increasing the disinvestment target from Rs 80,000 crore to Rs 1,00,000 crore. The STT rate could be modified on deliveries to collect more. The limit of Rs 1 lakh is too less. If it gets increased to Rs 10 lakh or more, small investors will not be impacted. This revision suggestion must be considered before the budget gets passed.
The current account deficit, which was not reduced as promised, is a call that the government took to have more funds for spending. Even next year the fiscal deficit will remain high. High minimum support prices for farmers means higher inflation. This would make the RBI wary of lowering interest rates. These are major negatives on economic front.
Lastly, the budget is expected to promote corporate earnings growth. If the spending targets are met, the rural economy would increase the purchasing power due to better infrastructure. More villages with power would sell more televisions and other FMCG items. More houses would promote housing and construction sector. Prosperity to farmers should increase the purchasing power. This is a major positive for the markets in the election year.