The latest Budget on an overall basis is broadly positive despite the higher tax on capital gains and higher STT. The negative sentimental effect of the higher taxes may be over in a couple of days.

The provision for boosting spends in the agri sector, increase in spend on affordable housing, new schemes to provide incentives for employment generation may lay the foundation for medium-term inclusive growth.

The sharp cutback in net borrowings and a cut in fiscal deficit could have a positive impact on interest rates and the attitude of foreign investors and rating agencies towards India. There exists a chance of a rating upgrade for India a few months down the line.

Based on the series of announcements made so far, the Budget has made provisions for increasing allocation to rural areas and the agri sector. This could spur consumption in rural areas. Putting more money in the hands of urban people by way of higher standard deductions, higher deductions for family pension and changes in slab rates under the new tax regime will do the same for urban consumption. Separate encouraging measures have been spelt out for the aquaculture/seafood industry, and leather and textile sectors.

Cutting rates for TDS and allowing TCS amounts to be set off against TDS liability for employees are welcome measures.

Cutting import duty on gold will moderate the rise in gold prices lately and make gold a bit unattractive as an investment avenue, at least temporarily.

The employment-linked incentive scheme has the potential to create lakhs of jobs if implemented well and make India’s growth more inclusive. A number of farming and rural-led initiatives could continue to boost rural incomes and the economy, and have trickle-down effects across the larger economy with some lag.

Investors are more concerned about possibilities to make money or gains rather than get too bothered by a 250- or 500-bp increase in tax rate from a low base. As of now, the Indian market offers opportunities to make money and hence the move to raise capital gains tax may not dissuade investors. However, as the difference in the rates has risen to 750 bps from the earlier 500 bps, investors may, if all things stay the same, want to hold on to their investments for a longer period to avail of the lower rate, displaying better investor behavior. Also, the hike in the exemption limit from ₹1 lakh to ₹1.25 lakh for LTCG is welcome and may offset, to some extent, the higher incidence of tax due to higher rates.

An increase in STT rates may have some impact on depth and liquidity, especially in the F&O markets, post October 1, but Indians are adept at adjusting to emerging situations and we are not too worried about the medium-term implications of this rise.

Focus will now turn to the progress of the monsoon, balance Q1 corporate results, global interest rate trends, local political developments including State elections and US presidential elections and their likely impact on India.

Corporate earnings may see an upward revision if the monsoon progresses well and macro parameters continue to show encouraging trends.

A big event is out of the way and so is its overhang. The outcome not being more negative than expected/possible, the markets recovered well from the lows of the day. Dip buying may continue for some time, as foreign investors may be broadly happy with the overall thrust of the Budget.

Valuation of Indian markets may inch up a bit, but a sharper re-rating may require a higher level of visibility on macro stability and micro growth. We remain cautiously bullish on the Indian equity market post the latest Budget.

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