What Budget 2019 means for the markets?

The capital markets have normally looked forward to the budget quite eagerly. Nani Palkhivala had famously said that “India was the only country where the budget was an event”. For the capital markets, the budget still remains the biggest event. Here are some important takeaways for the capital markets.

What does the macro picture paint?

At a macro level, the finance minister has confirmed that the growth of 7% GDP would be sustained and that India will transform from a US$2.75 trillion economy in 2019 to US$5 trillion economy in 2025. That is nearly US$2.25 trillion GDP addition and the market cap would go up proportionately. In short, the macro picture almost ensures that we are sitting on the cusp of a huge wealth creation opportunity in the next 4-5 years. The Budget has kept fiscal deficit targets at 3.3%, which is like buying growth with higher spending. That is totally acceptable considering that the inflation remains low. All in all, the budget has created a suitable atmosphere for equity investment.

Will corporate taxes impact equity investment?

The Finance Minister, Arun Jaitley, had promised back in 2014 that corporate tax rates would be systematically reduced from 30% to 25% over 4 years. However, this benefit was only restricted to companies with turnover up to Rs.250 crore. The latest budget has increased that limit to Rs.400 crore. The budget has also underlined that this will cover 99.3% of the number of companies listed in India. Of course, the entire list of Nifty 100 companies will be out of this list but this could be the trigger to revive the mid-caps in favour of the large caps. Investors may want to keep an eye on the mid-caps.

What do the FPI and NRI relaxations mean?

This appears to be a positive signal. FPI (Foreign Portfolio Investment) limits have been agreed to be eased to the industry benchmarks for the sector rather than any blanket limit. Also, the budget has decided to combine FPI and NRI investments under a single bracket. The idea is to encourage more of NRIs to participate in the equity markets. Of course, India has an experience of how NRIs and OCBs misused free access and the government may have to be careful of that.

Will increase in public shareholding requirements impact stocks?

In a surprise move, the budget is proposing to SEBI to review if the minimum public shareholding can be increased from the current level of 25% to 35%. There are over 1,400 companies in India where promoter holding is more than 65% and all these companies will have to reduce their stake. This will have two implications. In the short term, the sentiments will be negative for these stocks as is evident if you look at the top losers list on the budget day. Secondly, there is a positive side to it. Back in the early 1980s, the equity markets got a big boost when FERA shares had to be compulsorily sold to domestic investors. This led to most MNCs available at salivating rates and set the trend for the big bull market of the 1980s. This move to increase public shareholding could have a similar salutary effect as more quality paper comes into the floating stock. Also, the index values could change with change in free float weightage.

Now buybacks will attract tax too

A lot of cash rich companies were avoiding paying dividends and rewarding shareholders through buybacks. Buybacks saved them paying the Dividend Distribution Tax (DDT) and the income tax on dividends above Rs.1 million. To rectify this anomaly, the budget has imposed DDT on buybacks too as it is now almost tantamount to dividends. This could be a setback to buybacks but will also be favourable to the small investors as it would not allow the promoter to take wealth out of the company  via buybacks.

Some tax benefits and a boost to housing

Finally, the boost to housing is a big thrust for the capital markets. The HFCs have been brought under the regulatory purview of the RBI instead of being under the NHB, which makes them safer and more secure. Also individuals will now get Section 24 benefits of Rs.3.50 lakhs instead of Rs.2 lakhs for interest paid on low cost homes up to Rs.45 lakhs in value. These are favourable factors for the housing sector and the downstream impact on stock market wealth creation.