The new Union Budget is overall positive, even though the tax on capital gains and security tax (STT) have been increased. The negative sentiment due to higher taxes may fade away in a few days.
Provisions for increasing spending in the agriculture sector, increasing spending on affordable housing, new schemes for job creation, etc. can lay the foundation for inclusive growth in the medium term.
Sharp reduction in net borrowing and reduction in fiscal deficit may have a positive impact on interest rates and the attitude of foreign investors and rating agencies towards India. India’s rating is likely to be upgraded after a few months.
Nominal GDP growth is expected to be 9.9-10% for FY25. Given that real GDP is going to grow by 6-8-7% in FY25, inflation is estimated to be around 3%. We think the nominal GDP growth estimate may be revised upwards.
Based on the series of announcements made so far, the budget has made provision for increasing allocations for rural areas and the agriculture sector. This could boost consumption in rural areas. More money in the hands of urban people through higher standard deduction, higher deduction for family pension and changes in slab rates in the new tax regime will have a similar effect on urban consumption. Separate encouraging measures have been suggested for the aquaculture/seafood industry and the leather and textile sectors.
The reduction in TDS rates and measures allowing TCS amounts for employees to be set off against TDS liability are welcome.
Reducing import duty on gold will reduce the recent rise in gold prices and make gold somewhat more attractive as an investment option, at least temporarily.
The employment-linked incentive scheme has the potential to create millions of jobs and make India’s growth more inclusive if implemented well. Several agriculture and rural-led initiatives can boost rural incomes and the economy and have a ripple effect in the larger economy with some delay.
Investors are more concerned about the prospects of making money or earning profits rather than getting too upset about a 250 or 500 basis point increase in tax rate from a low base. For now, there are money-making opportunities in the Indian market and hence the move to increase capital gains tax may not discourage investors. However, since the difference in rates has increased from the earlier 500 basis points to 750 basis points, investors, all things remaining equal, may want to hold their investments for a longer period to take advantage of the lower rate on investments, thereby demonstrating better investor behaviour. Also, the increase in the exemption limit for LTCG from Rs 1 lakh to Rs 1.25 lakh is welcome and may offset the higher incidence of tax to some extent due to higher rates.
The increase in STT rates may have some impact on depth and liquidity especially in the F&O markets, but Indians are adept at adapting to emerging situations and we are not too worried about the medium term implications of this increase.
The focus will now turn to the progress of monsoon, balance Q1 corporate results, global interest rate trends, local political developments including state elections and US Presidential elections and their potential impact on India.
Corporate earnings could witness an upward revision if monsoon progresses well and macro parameters continue to show encouraging trends.
A major event is over and so is its overhang. With the outcome not being more negative than expected/likely, markets recovered well from the day’s lows. Foreign investors may be broadly happy with the overall trend of the budget as dip buying may continue for some time.
Valuations of Indian markets may be slightly up but sharper retracements may require higher levels of visibility on macro stability and micro developments. We remain cautiously bullish on the Indian equity market after the latest Union Budget.
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