The stock markets haven’t kind of taken positively to the budget proposals envisaged by the Finance minister.
One of the surest barometers of how economy is poised in the immediate & long term is the behavior of the stock markets. Some of the finest brains with razor sharp insight & vision for future trends in scrip’s, commodities & currencies are engaged day & night in the financial markets & they have for years tracked the currents, tailwinds & the emerging market scenarios, making the investors believe in their counsel & directions for future trade. However in the aftermath of 2019 budget being tabled in the parliament, there is not much cheer in the markets on the back of proposal of raising public shareholding limit and extending buyback tax on listed firms spooked investors sentiment
Though proposals relating to the capital markets took up a chunk of airtime in the Finance Minister’s budget speech, the stock markets weren’t particularly thrilled at the Union Budget for 2019-20. Remaining in the red for most part of the speech, the Sensex continues to go down the hill. There were three sets of budget proposals that possibly drew this adverse reaction from the stock markets. One, though expectations were high for the Budget to lift consumer spending out of its rut through short-term stimulus measures, no such measures have been announced. The expected increase in the basic income tax exemption slab from Rs 2.5 lakh to Rs 3 lakh hasn’t come about and there’s instead been a sharp increase in income tax rates for the super-rich, which may have implications for spending on premium products and services. Requisitions made by industry lobbies for indirect tax concessions on a range of consumer goods including passenger vehicles have been ignored. In fact, by hiking import duty on a range of imported electronic and electrical goods, the Budget has perhaps made some big-ticket consumption items costlier for the consumer.
The second cause is the nudge to SEBI to consider a higher public shareholding limit of 35 per cent, in place of the current 25 per cent for listed companies, threatens to unleash a fresh supply of shares into the equity markets, by way of follow-on public offers by companies who feature higher promoter holdings. While this will improve market depth in the long run, in the short run the supply overhang promises to depress stock valuations for companies that aren’t in fancied sectors. This could lead to the delisting of many MNC firms. If Sebi follows the government proposal, many MNCs and IT companies with high promoter shareholding will have to meet the requirement. There are 1,174 listed companies where promoters holding are over 65 per cent stake.Plans to dilute the government’s holdings in public sector firms below 51 per cent, at a time when these firms aren’t particularly popular with market participants, will also add to this supply deluge.
Thirdly, the proposal, restricting the corporate tax rate cut only to companies below 400 crore is perhaps a disappointment to the markets too. A quick calculation on NSE-listed companies shows that two-thirds of these companies will not be eligible for the benefit as they clock consolidated sales of over Rs 400 crore. In place of doing away with the Long Term Capital Gains Tax or Dividend Distribution Tax, the Budget seeks to plug tax avoidance through the buyback route by imposing a 20 per cent tax on cash returned through this route by listed companies. This tax was earlier applicable only to unlisted companies.This means, shareholder of a listed company will no longer enjoy exemption on income arising on account of buyback of shares. Adding to the woes, a listed company will now have to pay tax on buyback under section 115QA at the rate of 20 per cent plus applicable surcharge and cess. The move is likely to impact buyback by all listed companies in future.
The bond markets, in contrast to the stock markets, seemed quite pleased with the Centre’s decision to rely on offshore borrowings to fund its sizeable deficit, with the 10-year government bond yield falling below 6.7 per cent after the speech. This will free up headroom for domestic firms to access the bond markets and temper the costs at which they borrow.
Import duty on gold & other precious metals was hiked to 12.5% from current level of 10 per cent in budget 2019. It is to be noted that India is one of the largest gold importers in the world. In 2018-19, India imported gold worth $32.8 billion. The hike in import duty is likely to make gold costlier.
The budget failed to impress stock market investors as they were expecting Nirmala Sitharaman to roll back long term capital gains (LTCG) tax on equity investments in Budget 2018. According to experts, withdrawal of capital gains tax would have helped in channelizing more funds to markets either directly or through mutual funds. It can help bring stability in the market while making the investments in stock market and mutual funds more lucrative and beneficial for the investors.
Sitharaman has left India’s super rich class disappointed as she proposed to increase surcharge on high net individuals with a taxable income of over Rs 2 crore. For individuals in the income bracket of Rs 2-5 crore, the applicable surcharge will be 3 per cent while those earning above Rs 5 crore are looking at a surcharge of 7 per cent. For other categories of income payers, the tax rates and slabs remain unchanged.
While the immediate stock market reaction to the above proposals has been negative, investors need not worry as none of these proposals materially dents the long-term profit prospects of listed firms. On the contrary, the promised splurge on infrastructure building both in rural and urban India, the liquidity package for HFCs, the recapitalization and promise to dilute Government stakes in public sector banks are definitely long-term positives for equity markets in the long run. So is the increased headroom for FPIs to participate in domestic equities and bonds.