Pro-farmer and pro-poor Union budget leaves investors high and dry
Indian stock markets duly digested the most-awaited event of presentation of the Union Budget 2018-19. Despite expectation of a populist budget, Finance Minister Arun Jaitley remained rather undiplomatic on all fronts, brushing aside the possible repercussions on the 2019 elections. The budget proposals have not gone well with the equity investors. In fact, the introduction of the long-term capital gains tax at 10% on gains exceeding Rs 1 lakh without any indexation benefit would prove to be the biggest blow, especially for the HNIs. The reason for introducing tax on LTCG was the increased amount of exempted capital gains to the tune of Rs 3.67 lakh crore last year. On the contrary, it had been implied that the long-term capital loss would be applicable for set-off from here onwards. However, the number of retail investors who have just initiated investment in the stock markets through SIPs or otherwise would remain more or less intact.
The cut in corporate tax rate to 25% from 30% for revenue up to Rs 250 crore comes as a silver lining for the micro, small and medium enterprises. The announcement could lead to bounce back in the small-cap stocks, which were off their peaks since the second week of January amid cyclical correction. The FM chose to remain silent on the tax slabs for salaried employees, but introduced several deductions in medical and transport allowances, thereby benefiting the higher age group employees. To encourage more women employees in the workforce, the EPF contribution has been reduced to 8% from 12% for initial three years. However, the increase in education and health cess from 3% to 4% came in as a disappointment for the taxpayers.
On the sectoral front, as expected, the budget focused on the infrastructure and agriculture sectors. The government has allocated Rs 5.35 lakh crore for road development to bring in continuous connectivity through 35,000 km of roads in the first phase. The budget came in as a big boost to the agriculture sector where the government has declared that the MSP (Minimum Support Price) will be 1.5x of the cost of production for all crops. Thereby, with higher focus on organic farming and allied credits and alternative income sources for farmers, the agro-based industry is likely to help double the farmers' incomes. Further, the allocation of Rs 7140 crore to the textiles sector would help offset the negative impact of the GST roll-out and thereby help increase textile (apparel) exports, following the 12-14% growth it posted in 2016. Secondly, the social sector of education received a boost with allocation of Rs 1 lakh crore for purposes ranging from the training of trainers to promoting learning and education amongst lower castes. Healthcare too received the much-needed push with introduction of NHPS (National Health Protection Scheme) for insurance cover of Rs 5 lakh for 10 crore poor families, covering nearly 35% of the population.
The focus on 'Housing for All by 2022' scheme, which was initiated by the Modi Government, continued in the budget. This budget assigned infrastructure status to the projects under this scheme and mulled allocation of funds through the National Housing Bank. The government proposed construction of 3.7 million and 5.1 million homes in the urban and rural areas, respectively. Last, but not the least, the allocation of Rs 1.48 lakh crore to the Indian Railways, giving impetus to Bangalore Metro and Mumbai suburban railway network, unmanned railway crossings and technologically advanced infrastructure facilities would help boost the railway sector.
All said and done, no direct benefits have been given to the individuals, but derived benefits by way of boost to industrial development may bring in some liquidity in the economy. The Q3 corporate earnings recovery is the current biggest support to the markets, which may keep the markets going, albeit with some stock-specific hiccups. The upcoming elections in eight states would be keenly watched for voters’ reaction to the budget announcements. The RBI policy could be the next trigger, but it will not a very strong one, as investors expect yet another status quo stance on the part of the central bank on account of the growing concerns on inflation.
The biggest threat to the markets is the shift in investment preference from the MFs/SIPs, the hottest equity investment channel, for now. We believe that 10% LTCG tax and dividend distribution tax of 10% on equity would see some shift in the selection of type of mutual funds and may not impact the traditional safe havens of FDs, commodities, etc.
