Though proposals relating to the capital markets took up a chunk of airtime in the Finance Minister’s budget speech, the stock markets weren’t particularly thrilled at the Union Budget for 2019-20. Remaining in the red for most part of the speech, the Sensex had lost over 300 points by the time the FM wound up her speech.

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There were three sets of budget proposals that possibly drew this adverse reaction from the stock markets. One, though expectations were high for the Budget to lift consumer spending out of its rut through short-term stimulus measures, no such measures have been announced. The expected increase in the basic income tax exemption slab from Rs 2.5 lakh to Rs 3 lakh hasn’t come about and there’s instead been a sharp increase in income tax rates for the super-rich, which may have implications for spending on premium products and services. Requisitions made by industry lobbies for indirect tax concessions on a range of consumer goods including passenger vehicles have been ignored. In fact, by hiking import duty on a range of imported electronic and electrical goods, the Budget has perhaps made some big-ticket consumption items costlier for the consumer.

Two, the Budget proposal to nudge SEBI to consider a higher public shareholding limit of 35 per cent, in place of the current 25 per cent for listed companies, threatens to unleash a fresh supply of shares into the equity markets, by way of follow-on public offers by companies who feature higher promoter holdings. While this will improve market depth in the long run, in the short run the supply overhang promises to depress stock valuations for companies that aren’t in fancied sectors. Plans to dilute the government’s holdings in public sector firms below 51 per cent, at a time when these firms aren’t particularly popular with market participants, will also add to this supply deluge.

Three, the proposal restricting the corporate tax rate cut only to companies with a turnover of up to Rs 400 crore is perhaps a disappointment to the markets too. A quick calculation on NSE-listed companies shows that two-thirds of these companies will not be eligible for the benefit as they clock consolidated sales of over Rs 400 crore. In place of doing away with the Long Term Capital Gains Tax or Dividend Distribution Tax, the Budget seeks to plug tax avoidance through the buyback route by imposing a 20 per cent tax on cash returned through this route by listed companies. This tax was earlier applicable only to unlisted companies.

While the immediate stock market reaction to the above proposals has been negative, investors need not worry as none of these proposals materially dents the long-term profit prospects of listed firms. On the contrary, the promised splurge on infrastructure building both in rural and urban India, the liquidity package for HFCs, the recapitalisation and promise to dilute Government stakes in public sector banks are definitely long-term positives for equity markets in the long run. So is the increased headroom for FPIs to participate in domestic equities and bonds.

The bond markets, in contrast to the stock markets, seemed quite pleased with the Centre’s decision to rely on offshore borrowings to fund its sizeable deficit, with the 10-year government bond yield falling below 6.7 per cent after the speech. This will free up headroom for domestic firms to access the bond markets and temper the costs at which they borrow. 

It is also best not read too much into the financial market’s immediate reactions to the Budget speech, as the aggregate impact of the Budget will be clear only after the fine-print in the accompanying documents has been thoroughly dissected.

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