The big day which the financial markets await for, has come and gone. If the market reaction is any indication, then the volatility and the intraday movement suggests how the news was taken in its stride. However, markets historically have reacted to the budget after the budget day.
Markets generally react to the fine prints in the budget and how they will impact the economy in general and each sector and company in particular. This too fades out over a period of few days if not weeks. What decides the overall trend for the market is whether the budget will induce growth in the Indian economy.
We shall look at the budget closely and how will it impact the economy on a longer term.
Let’s look at the measures announced for the markets.
LTCG: The worst fears of the equity markets have came true. Finance Minister Arun Jaitley announced a long-term capital gain (LTCG) of 10 percent. Thankfully he has introduced the grandfathering clause which in essence means that long-term capital gains on old purchases would be capped at the high of 31st January 2018, Government will gain tax only if markets or stocks move higher from these levels. The move, however, plugs the avenue of conversion of black money to white which was rampant earlier.
However, LTCG, as a tax was there till 2004 and would not be so much of an issue as the difference between equity returns and another form of asset classes, are still in favour of equities by a long distance.
The rationale behind introducing this tax as explained by the finance minister was that a large portion of the investment in the market was done by corporates and LLP entities. In the budget speech finance minister said that the total amount of exempted capital gains from listed shares and units is around Rs 3,67,000 crore for the assessment year 2017-18.
The tax could tempt some high net-worth investors and corporates to sell their shares until March 31, 2018, and lock in their long-term capital gains.
Corporate tax: An expectation that was not met was lowering of the corporate tax rate. The finance minister has reduced tax rates to 25 percent for corporate with revenue up to Rs 250 crore. While most of the top rung Indian companies have a higher revenue, 99 percent of registered companies fall under Rs 250 crore. Technically finance minister is right when he says that he has fulfilled his promise of reducing tax rates to a large section of companies, but equity markets may not appreciate the sarcasm.
There is another view that is making the rounds and that is the finance minister does not want to reward the private sector as they have not been forthcoming with their investments in the first four years of the government and rather used the cash in their hand to invest in markets. Any tax reduction in the final year would not have made the companies commit to new investments.
But the fact is that the bigger companies may face difficulty in exports as various countries have slashed tax rates and Indian companies will have to cut rates to be competitive.
Employment generation: Though the bigger corporates have not got their wish granted, government has given enough incentive to increase employment by announcing special incentives for new hiring. Many schemes have been announced to promote investment in job-creating sectors such as textiles, leather, roads, and railways.
Fiscal Deficit: A big negative that some observers like to point out is the higher fiscal deficit of 3.5 percent against 3.2 percent budgeted earlier. But given the disruptions on account of GST implementation and the fact that the government had access to GST income of only 11 months, the number does not look as bad.
Further, 3.2 percent in FY19 signals that the government is continuing on the path of fiscal consolidation.
Government borrowing: The underlying message in the government sticking to fiscal discipline at the same time going in for a populist budget suggests that government borrowing will go up. As per the budget document market loans are forecasted at Rs 6.06 lakh crore as compared to Rs 6 lakh crore in FY18. It needs to be remembered that government borrowing in FY18 had overshot by Rs 20,000 crore as its budgeted target was Rs 5.8 lakh crore. Higher borrowing in FY19 suggests that interest rates are unlikely to come down anytime soon, in fact, chances are that they may go up. Bond yields have shot up post-budget announcement and are signaling troubled times ahead.
Divestment target: For the first time in many years the government had surpassed the divestment target by touching the Rs 1 lakh crore mark against a budgeted figure of Rs 80,000 crore. For FY19 the divestment figure has been kept at Rs 80,000 crore which would need a buoyant market to achieve the target.
Salaried Employees: Not much was offered for the salaried employees apart from the reintroduction of the standard deduction. This time around a standard deduction of Rs 40,000 has been given by the finance minister. However, this has been in lieu of transportation exemption of Rs 19,200 and medical reimbursement of Rs 15,000. In other words, the benefit for an employee who was availing these exemptions is only Rs 5,800.
Housing: As has been the trend over the last few years, government’s focus on housing in mainly in the affordable housing area. This year too, the finance minister has reiterated that housing will be provided to all by 2022. Funds have been set aside to meet the target and non-banking finance companies will be given more consideration for advancing the loans.
Agriculture: A big development in the budget is the announcement of making tenant farmers at par with farmers. Nearly 60 percent of farming in India is undertaken by landless farmers. Unfortunately, since they do not own any land or assets they are out of the banking system and have to rely on the local moneylender to meet their financing need. Further, these farmers are also deprived of subsidy schemes and incentives that are announced by the government. By equating the tenant farmer to a farmer and asking the banking system to start lending to these neglected segment of the society the budget has perhaps done the biggest favour to the rural poor.
The budget also has taken into account the stress that the farming community has faced last year despite good rains. It has now proposed that the Minimum Selling Price (MSP) of kharif crops will be set at 1.5 times the cost. This too is a big development for the rural economy which can help boost consumption going forward.
Healthcare: Undoubtedly the biggest take away from the budget is the announcement of a mega healthcare scheme for the poor. A flagship National Health Protection scheme to cover 10 crore families and 50 crore individuals have been announced. An insurance cover of Rs 5 lakh per household will be provided by the government for them. The government has also focused on improving healthcare infrastructure in the overall economy to implement its policy.
Infrastructure: The fact that India needs infrastructure at a rapid pace is known and this government has been increasing its provisioning every year. Further, it has been monitoring its investment and focusing on implementation. A record capital expenditure outlay has been provided by the government in the current year with an equal focus on railway, roads, airlines, and waterways. But the important point to note is that financing of these infrastructure has been kept out of government’s balance sheet. In other words, innovative financing schemes like securitizing cash flows and utilizing non-core assets like real estate will be used to finance these projects.
In short, the budget has catered to the issues highlighted by the Economic Survey on issues of infrastructure, agriculture, employment and rural development. Where it has fallen short of expectation is on the tax front, both the corporate tax and capital gains tax. As this was the last budget ahead of the general election a socialist budget was expected and that has been delivered.