Before the presentation of the Union Budget, the two main concerns of stock market investors were the likelihood of a return of tax on long-term capital gains, and how bad the fiscal deficit figure would be, and if it would be higher than earlier announced.
Both concerns came true. Finance Minister Jaitley introduced a 10 per cent capital gains tax without the benefit of indexation (to inflation), but after a grandfathering of gains, which mitigates the tax pain.
The revised fiscal deficit for the year was higher than the budgeted figure, at 3.5 per cent of GDP, and forecast to be 3.3 per cent in 2018-19. This year’s deficit would have been higher but for the sale of government ownership of HPCL to ONGC, which has had to borrow money to pay for the purchase. This is an accounting play.
The FM justified the LTCG by stating that about ₹3.6 lakh crore of gains reside in the books and, with the market having amply rewarded investors, they ought not need to depend on a fiscal incentive. True enough. However, the denial of indexation to inflation when, an hour ago, he permitted the salaries and perks of MPs to be inflation-indexed, smacks of an unfair treatment of all those who are not ‘privileged’.
Similarly, deposit insurance for bank deposits has not been indexed to inflation, and remains at a paltry ₹1 lakh. Nor has the basic tax exemption limit for individuals. This is iniquitous.
The stock market took a day to digest the Budget provisions, and reacted a day later. The Sensex dropped 839 points to 35,066, led largely by FII sale. They have the flexibility of movement of money and threaten to reduce their India exposure.
They will, however, return, if the India growth story continues upwards. So will those who have recently invested in the equity market and have sold nervously in the fall. The only caveat is a major global factor causing a further fall.
The Budget laid stress, and rightly so, on improving the situation for the farmers. Though agriculture provides employment to some 54 per cent of our population, they get a share of only 14 per cent in national income. A planned increase of ₹11 lakh crore for agriculture credit will facilitate this. So will the proposal to allow local Grameens to procure produce from the village for farmers who cannot reach the APMC markets.
The Budget has also put focus on education, including quality education for tribals, and a focus on ensuring that the education system produces graduates with required skill-sets, not just numbers; as well as on healthcare.
With the Budget out of the way, investors would focus on the global scenario. The worries here are rising prices of crude oil (which will bloat India’s current account deficit, weakening the currency, and leading to higher oil prices and inflation), and the rising global interest rate scenario.
Net net, it has been a good budget, with correct focus on improving the lot of the farmer, providing better and wider education and healthcare, and concentrating on infrastructure. The market has fallen, sending a message of distaste for tinkering with tax rates, which the FM should take note of.
(The writer is India Head — Finance Asia/Haymarket. The views are personal.)