Markets pin huge reform hopes on budget

Markets are likely to exhibit bullishness in and around the budget largely on expectations of a pro-growth budget that is expected to address infrastructure bottlenecks, improve power supplies by refinancing ailing state electricity boards, allocation of resources and probably permit banks a one-time forbearance under non-performing asset classification, say economists, bankers and experts from the equity fraternity.

The low global crude prices have come as boon for oil-dependent economies including India. From last year's peak of $115.70 on June 19 to the current levels of around $59 a barrel, the slide has resulted in estimated savings of around Rs 65,000 crore for the government on subsidies, besides fetching it another Rs 30,000 crore in excise duty hikes, not to forget the dividends it would reap from its oil marketing companies -- IOC, HPCL and BPCL.

Given the kind of boost in terms of revenues, the government, with its divestments proceeds, coal block and spectrum auctions, in all probability will achieve the 4.1% fiscal deficit target for the current fiscal. This brings it in a commanding position when it comes to meeting the preset 2016 fiscal's deficit mark of 3.6%.

Ritesh Jain, chief investment officer at Tata Mutual Fund, said, "The government will use PSUs to step up capex cycle and boost growth there by improving sovereign balance sheet and achieving the twin goals of fiscal consolidation and growth."

Many fund managers expect retail investors to come back to equity markets as none would want to miss the opportunity. But for encouraging this class of investors, transaction taxes need to be addressed, they echoed.

"If retail investors are to be part of India's growth and the savings are to be channelised into equities, the government needs to lower or do away with some of the taxes levied on primary and secondary equity market transactions," said Kapil Bali, CEO at YES Invest.

There are about five types of taxes for one equity transaction: Securities transaction tax at 0.1%, Sebi fees of 0.0002%, exchange transaction charges 0.00325% and 0.00275% (NSE and BSE respectively), stamp duty of 0.002% (Maharashtra) and a service tax of 12.36% on brokerage, Sebi fees and transaction charges.

"These charges have to be re-looked and there is a need to rationalise them," said Bali.

"These are indeed issues, but we need to give the government some time as this is the first major budget where it has the absolute power to allocate funds. In the earlier budget, the government had little time to ponder, and it was done too quickly after it took over from the UPA government," said a fund manager at a foreign institution.

"This time around, the government will consider long-term solutions in power, revive state electricity boards. Stocks from engineering, construction, cement, infrastructure sectors could get a boost if the government pushes the growth momentum by addressing macro issues," said U R Bhat, managing director at Dalton Capital Advisors (India).

Most market players say the previous budget of the government was largely based on presumptions, and this would be a full-fledged one aimed at removing infrastructure bottlenecks, kick-starting manufacturing and at the same time giving the salaried class the much needed tax reliefs. According to Kanwar Vivek, senior vice-president and head of wealth management at YES Bank, there could likely be an increase in income tax exemption limit from the current Rs 250,000 to Rs 500,000 that could increase disposable incomes leading to improved purchasing power.

This also implies, consumer spending could rise. Another measure the government could contemplate is on stretching the home loan interest limit from the present Rs 200,000 so that housing sector gets a fillip and people, affordable homes, all leading to economic growth.

"There should be more details about key economic initiatives, and commitment to taxation reforms including implementation of GST," said Jain.

However, most bankers and economists are awaiting the fiscal deficit numbers and the government's borrowing programme. About Rs 1.35 lakh crore of government bond redemptions are due this fiscal and another Rs 1.65 lakh crore in the next fiscal.

"This means, when over 80% of the government's market borrowing is in bonds, there could be a huge glut of bonds in the market," said Ashutosh Kajaria, treasury head at Federal Bank.

Many bankers were of the view that the government will in all likelihood turn over such redemptions through issuance of fresh bonds and that means more bonds flooding the market, leading to lower prices or pushing up the yield curve. The Reserve Bank of India will hence be faced with another daunting task of managing yields from surging too high or banks would find investing in government bonds more attractive than lending.