What the Union Budget 2020 means for Capital Markets?

We normally gauge the impact of the budget on the capital markets by the impact on the Nifty and the Sensex. That was hardly flattering. The Nifty corrected by 300 points and the Sensex lost close to 1000 points on Budget day. The levels of 12,000 on the Nifty and 40,000 on the Sensex had taken close to 9 months to decisively break and both these levels have been lost. What have been the big positives and negatives for the stock market? Let us look at the negatives first.

What made the markets unhappy about in the Union Budget 2020?
There were quite a few factors that made the stock markets uncomfortable. Here are some of the disappointments.
  • The status quo on long term capital gains (LTCG) tax has been a major irritant for the investors. It has the potential to impair long term portfolio values and there were strong expectations that this would be scrapped. This is also a flat tax without any indexation benefits.
  • The scrapping of DDT was a good move but replacing that with peak rates of dividends does not really add value. This move may reduce the burden on the lower holding groups but if there is a steep tax on dividends in the hands of shareholders, then companies are unlikely to declare generous dividends.
  • The fiscal deficit was a shock although some spillage was expected. The budget has utilized the full leeway of 0.50% for the current and the next fiscal year. This clearly shows that the problem of fiscal deficit is more structural than seasonal. A sharply higher fiscal deficit has negative implications for the sovereign rating of India as well as for the bond yields in the debt markets.
  • The stock markets were expecting some big announcements in terms of infrastructure spending. But, the budget has only reiterated the commitment to infuse Rs103 trillion into infrastructure in the next 5 years. Markets would have been much happier with a clear roadmap on the infrastructure front.
  • The budget did little by way of putting more money in the hands of people. The idea was that the budget would give exemption up to Rs5 lakh and then lower taxes up to Rs20 lakhs. While the budget has extended this benefit up to Rs15 lakhs, it comes at the cost of exemptions that have to be foregone. That does not go down well as many of these exemptions are commitments for tax planners.
  • The disinvestment target of Rs210,000cr looks optically appealing but that is largely predicated on the LIC divestment and that may be much easier said than done. To sell a stake in LIC with AUM of close to $550 billion you need tremendous risk appetite in the market. Also, the NPAs of LIC have gone up sharply in the last few months and that is also a dampener for the markets.

But there are some structural positives too
While short term challenges to markets remain, the long term structural advantages cannot be ignored. Here are some samples.
  • The extension and enhancement of the partial credit guarantee scheme for NBFCs is likely to be a major positive for the stock markets. After all, it is the NBFC and realty sector that has been the bane of the financial markets. The decision to exit IDBI fully is also a good starting point and could mean more rationalization of government holdings in business.
  • The extension of factoring support to MSMEs, facility of subordinated debt and the hand holding mechanism offered are likely to address the most stressed segment of the capital markets. If the liquidity crunch in this space is addressed, it could have a salutary impact on overall market liquidity.
  • The Budget 2020 has also focused on Rs1,000cr package for specific export oriented sectors like pharma and auto ancillaries. The idea is to give 10% of this amount as equity and the balance as debt. This will give a boost to much needed exports and rectify the trade balance, putting less pressure on the rupee.
  • On the positive side, the budget has opened newer investment products for the investors at large. Government securities are being made available to NRIs in a big way to broaden the market. Secondly, there is a complete legislation on credit default swaps (CDS) that is likely to come soon. The Budget has also spoken about a big push to Debt ETFs to fill the gap in the bond markets.

In all, the short term looks challenging with too many question marks. However, the long term structural steps have been taken in the budget. One can only hope that things work out for the markets.

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