St need not worry about tax upheaval

The stock market rally in 2017 started with an optimistic Union Budget, which arguably maintained a balance between growth and fiscal prudence. A year later, with markets up over 25% and perched at fresh all-time highs driven by the unrelenting pace of inflows, the stock market doesn’t want the Budget to rock the boat.

2018 is arguably a year where finance minister Arun Jaitley would want to give some doles before 2019 elections; hence, some populism is on the cards. But market participants are hoping that the imminent populist tilt will be limited and fiscal discipline will be the keyword.

History suggests that expectations (as measured by pre-Budget performance) are still important in determining what the market does after the Budget. The past 25 years’ data shows that when the market is up pre-Budget, there is a two-thirds chance of it falling 15 days post the Budget announcement. For long-term investors, what the market does after the Budget is far more important than what happens on February 1.  

“Our discussions with investors suggest expectations that the government may turn populist this year, with the 2019 elections in mind,” said Gautam Chhaochharia, head of India research, UBS Securities India Pvt Ltd on his full-year outlook.

Morgan Stanley’s Ridham Desai feels the potential for corporate tax rates to decline is more likely. A one percentage point decline is already in the offing (given the finance minister’s previous Budget speech). “We do not expect more than a 1ppt cut given the fiscal constraints,” Morgan Stanley said.

Divestment is important too. The previous Budget’s disinvestment target of Rs 72,000 crore is likely to be overshot by a big margin if the sale of HPCL to ONGC goes through. A big number this year will be negative for equity markets given the increased supply it brings, but it may also compel the government from not tinkering with capital gains tax regime for stocks.

“We doubt the government will change the capital gains tax regime for equities given (1) its negative impact on household savings and (2) its own large divestment programme for FY2019,” points out Sanjeev Prasad, co-head and managing director, Kotak Institutional Equities.   

Many experts are concerned about how wide the divergence will be from the planned fiscal consolidation path. If the divergence isn’t much, rating upgrades could happen. However, the economy needs spending too. Any fiscal deficit number beyond 3.4-3.5% will worry markets. “We expect the government’s fiscal deficit for FY18 to come in at 3.5% of gross domestic product or GDP, against the budgeted 3.2%,” said Teresa John, economist - institutional equities, Nirmal Bang.

Sunil Singhania, global head - equities, Reliance Capital, said, “The Budget is not likely to be too populist. Government policies, irrespective of elections, have always been pro-development. The government has already taken a number of policy initiatives in its tenure thus far. Going ahead, they will focus more on execution.”

Farms are important for stock markets because rural consumption is good for them, and markets want a business-friendly government to stay.

Arun Thukral, MD and CEO of Axis Securities, said, “Given the verdict of Gujarat elections and upcoming state and general elections, we expect the Budget will focus on alleviating agrarian distress and improving rural economy on the lines of the theme of doubling farmer’s income by 2022 proposed earlier. Substantial hike in MSPs (minimum support prices) is unlikely as the government also has its job to balance the inflationary forces.”

THE STORY SO FAR

• 2017: Tax rate for firms with annual turnover of less than Rs 50 crore cut to 25%; divestment target at Rs 72,500 crore
   
• 2016:  STT on sale of options when those are not exercised raised from 0.017% to 0.05%; divestment target set at Rs 56,000 crore