Budget 2016: Budget Impact on Capital Markets

The budget has some interesting takeaways for the capital markets; both the equity and debt markets. Here are a few of them:

  • At a broad macro level, the budget has attempted to put a lot of money into the hands of the rural population. The decision to double rural incomes over the next five years is going to be a major positive for the equity markets in terms of demand generation in the economy.
  • The fiscal responsibility target of 3.9% for this year and 3.5% for next year is a great boost for India’s external rating. Global rating agencies are likely to look at India more positively as the FM has promised to maintain the sanctity of fiscal deficit targets. This is likely to go down well with foreign investors too as they were worried about fiscal deficit targets being missed.
  • The decision to impose an additional tax of 10% on high dividend earners (above Rs.10 lakh per annum) is likely to be a negative for the equity markets. Remember, DDT is already a case of double taxation because divided is a post-tax appropriation. In case of HNI investors, this almost becomes a case of triple taxation.
  • The decision not to impose LT capital gains tax is a major positive for markets as that was along expected lines. More importantly, the government has also clarified that it does not propose to change the definition of long term capital gains to 3 years.
  • There was a strong expectation that Service Tax rates will be hiked from 14% to 16% this budget, which again did not happen. This is again a positive for the equity markets.
  • For equity markets, the increase in STT may be a short term negative. The STT on options has been increased from 0.017% to 0.050%. This three-fold increase is likely to impact volumes in the options trading. Remember, this is the largest source of volumes in the equity markets today and hence impact on volumes rather than on value will be seen.
  • The banking recapitalization is probably an area of disappointment for the market. In the run-up to the budget, there was a lot of hope built up around a massive allocation of Rs.35,000 crore for the PSU banks. At Rs.25,000 crore, the number  is much below  expectations and that is likely to weigh on markets.
  • The overall thrust on road and rail infrastructure is a positive for capital markets for 3 reasons. Firstly, it creates a demand for these stocks in the equity market. Secondly, infrastructure has a major multiplier effect on the other sectors of the economy. Thirdly, it has a high sensitivity to GDP growth which is likely to be positive for markets overall.
  • But the biggest impact of this budget has been for the debt markets. The sharp fall in debt borrowings this year is largely due to higher non-tax revenues that have been budgeted. This was clearly evident when the yields started falling sharply and have also raised the hopes that the RBI may cut rates due to the budget maintaining fiscal responsibility.

At a micro level, there have been negatives in the form of lower bank recapitalization allocation and the imposition of dividend distribution tax. However, the decision to spur rural income and the infrastructure push is a major positive for the Indian markets. Both the asset classes of equity and debt should have a lot to cheer about.

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