The disappointment of the equity market appears an overreaction, but there are sentimental issues as regards the selling pressures gaining momentum across the board. In what way the removal of dividend distribution tax(DDT) helps the tax burden of investors, as they might pay up more by way of income tax. While small savings will be hit given the option to shift to the new income tax slabs, there is no clarity as regards the net flows into the equity market with the net reduction of income tax. The market was eagerly hoping for a correction in the Long Term Capital Gains Tax (LTCG) which the FM silently ignored. The government passes on the hard choice to the middle class in so far as their tax savings versus direct tax savings from income.
Most importantly the fall in the Bank Nifty due to the additional burden on the banking sector due to five times hike in the deposit insurance costs, up to Rs 5 lakh per depositor. There are no clear policy measures as regards the banking sector is concerned, except that they are encouraged to raised borrowing from the market for additional capitalization. Disinvestment of the Life Insurance Corporation to the extent of 10 percent will bring substantial money for the Government given their valuation which stands over 29 Lakh crore. This along with the dilution of Government remaining share in the IDBI Bank and the sale of Air India that has already announced which will add to Government’s kitty.
The macro worries still remain, given that fiscal deficit targets raised to 3.5 percent of GDP along with a lower target of nominal GDP growth target of 10 percent for the FY21, and the unclear roadmap for the higher borrowing programme of the Government. Inflation is already catching up and the lowering of the interest rates path will be held back, the RBI’s Monetary Policy Committee (MPC) is expected to keep the Repo rate steady. The Budget has not addressed the present demand slackening that has contributed to the growth slowdown, and particularly rural consumption, which might delay the revival of the economy in the near term. There is not much structural reform agenda in the Budget proposal, though there are no freebies and hike in the unproductive expenditures. The FM leaves the challenges of the growth revival to the market, as factors that would hinder would be higher interest rates going forward, unclear infrastructure financing plan, and specific measures to enhance credit flows from the banks and NBFC sector.
There is considerable focus on attracting foreign portfolio investment flows are placed in the Budget, in the form of raising their share from 9 percent to 15 percent, opening up of Government securities to NRIs, and most importantly the incentives for the Sovereign Wealth Funds (SWFs) in financing infrastructure. There is definitely scope for the growth of the corporate bond market, by way of FPI inflows and particularly into the companies that would benefit from the abolition of dividend distribution taxes.
Dr HK Pradhan
Professor of Finance & Economics
Chair, Financial Market Centre
XLRI – Xavier School of Management