Personal Finance

The market has great expectations from the Budget

Ajay Menon | Updated on January 26, 2020 Published on January 26, 2020

With a slowing economy marked by a 11-year low GDP, the FM has a tough task ahead

Budget FY2020-21 holds a lot of significance, as India’s economy is witnessing a slowdown, with lacklustre consumer demand, modest tax collection and GDP growth for 2019-20 estimated at 5 per cent, an 11-year low.

Thus, expectations and excitement are running high to the run-up to the Budget.

Against this backdrop, the biggest expectation from the Finance Minister is to revive growth and bring the economy back on track.

There has been an increasing pressure on the government to increase spending and to loosen the fiscal deficit for the year.

For a retail investor, some of the key factors in the Budget would be the fiscal maths, changes in taxation (personal and equity market-related taxes), divestment plans and targets for 2020-21, and steps to revive economic growth. The government took a bold step and slashed the corporate tax in September 2019, from 30 per cent to 22 per cent, and for new manufacturing units to 15 per cent, which clearly signals the government’s shift from ‘fiscal prudence’ to ‘growth revival’.

Consumption push

Now, the Centre needs to address the demand side by pushing consumption, for which it must focus on putting money in the hands of the masses. Initiatives should be taken to support job creation, besides enhancing infrastructure spending and policies for the agricultural sector.

There should be a push for labour-intensive industries such as construction, housing, road-building and irrigation, which can trigger immediate consumption. Rural demand has been weak due to a sharp drop in farm prices. Hence, we can expect some more policies and stimulus for the rural and agricultural sector as well.

There is increased expectation on the Centre to cut personal income tax rates or increase the income tax exemption, which can help increase personal consumption and investments.

Investors are expecting streamlining and rationalising of the capital market tax structure, such as STT (Securities Transaction Tax), long-term capital gains (LTCG) tax and Dividend Distribution Tax (DDT). The rationalisation of LTCG tax will encourage investment in equity and mutual funds.

Some of the measures the government can take to increase retail participation in the equity market are i) providing tax relief in the form of increasing the minimum tax slabs, leading to higher savings and investments, ii) increasing the exemption limit under Section 80C so that retail investors can channelise their savings into equity market through mutual funds (ELSS - equity-linked savings scheme) or unit-linked insurance plans (ULIPs), iii) removing tax on LTCG entirely or making it tax-free for a holding period of more than three years to inculcate long-term investments in equities.

Apart from these, the market also expects a relief in DDT. Currently, DDT is taxed at the corporate level at around 20 per cent. The market is expecting either a reduction in the DDT rate or taxing it at the hands of individual investors.

Corporate debt

For the government’s ₹102-lakh crore infrastructure investment plan to succeed, the Indian corporate debt market needs to be deepened in order to raise finance. Hence, more policy announcements can be expected for boosting the corporate debt market. Some of the other sectors that may be provided with specific incentives and reforms are NBFCs, insurance, realty and auto.

However, we believe that a challenging fiscal situation with minuscule growth in tax collections is likely to limit the FM’s ability to provide a huge demand stimulus.

Any demand stimulus is likely to be compensated by an increase in indirect taxation and through non-traditional routes, including disinvestment/privatisation, to fill the income gap. We believe that the FM needs to create a reasonable balance by supporting economic growth while focussing on fiscal discipline and reforms.

The writer is CEO, Broking and Distribution, Motilal Oswal Financial Services

Published on January 26, 2020

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