6 mins read . 18 Jan 2023
Union Budget 2023 will be observed closely for the budget impact on stock markets. The Nifty on budget day history is quite even in the last 10 years, so not much of a trend can be inferred. With market capitalization of $3.4 trillion, the current stock market capitalization does not permit too much upsides immediately. Also, there is very little that the budget can do to boost capitalization in stock market at this juncture.
To understand budget impact on stock market, one needs to closely look at Nifty on budget day. However, this has been largely even. It remains to be seen how the budget impacts the market capitalization in stock market. Here is a quick take on capital market and stock market impact of the budget.
That will be a key deciding factor of whether the budget will boost stock markets. The fiscal deficit was set at 6.4% for FY23, but the upcoming budget is likely to peg the fiscal deficit at 5.8% or even lower. Much of the free food subsidies would be moved to the fair price model. Also, the government is likely to focus its spending on capex rather than on routine spends like subsidies. But the big kicker for the markets will be if the budget can provide a glide path towards 4.5% fiscal deficit to GDP ratio in the next 3 years. That would not only enthuse the rating agencies but also provide a leg up for the FPIs. It could also help to turn the persistent tide of FPI selling seen since October 2021. A fiscally prudent budget could go a long way.
This can happen in multiple ways. To boost the sales of automobiles, the GST rates on cars can be normalized instead of keeping them in the peak 28% bracket. Raising the income tax exemption limit to Rs5 lakhs would save the tax filing hassles for a lot of small tax filers. Also, it would induce people to spend more, especially since this segment has a higher propensity to consume. There is a lot of liquidity that gets tied up due to very elevated peak rates of tax for the higher income brackets. The peak rates at 44% are too steep and a reduction can give a big boost to spending. Also, higher exemptions under Section 80C (from Rs1.50 lakhs to Rs3 lakhs) and higher limit on Section 24 (from Rs2 lakh to Rs5 lakhs) would put a lot of cash in the hands of the upper middle income groups or the mass affluent. This can induce a lot of long term investing.
There is a high probability that this would happen in this budget. For instance, STT may still stay, but the government may look to do away with long term capital gains tax. It tends to distort long term returns and retirement goals. Thus, the long term capital gains tax exemption can go a long way in boosting long term equity investments. Dividends are taxed in the hands of the investor at the peak rates. That is unfair since dividends are a post-tax appropriation and results in double taxation. With the onus of buyback tax likely to be shifted to the investor, it would boost markets if the capital gains tax is scrapped (even with 3 year lock-in) and if dividends are made tax free, or put at par with dividends.
Today, a capital market friendly budget is not just about the Nifty movement but also about the options for the investor to diversify risk. One thing that the government can do is to give a boost to passive assets and alternate assets and put them at par with equities in terms of taxation. For instance, many of the passive funds don’t get the same preferential tax treatment that equities get. There is also an anomaly. Listed debt is LTCG if held for 1 year but debt funds are LTCG only if held for 3 years. The budget can work to remove such anomalies. Also putting REITS and INVITs on par with equities for taxation will make these products a lot more attractive for investors. That is the boost required.