What equity markets expect from the Finance Minister?
The Finance Minister and her team have been conducting hectic parleys with the various stakeholders on Union Budget expectations. Here is what the capital markets would broadly be expecting.
January 16, 2023
What Equity markets expect from the Finance Minister?
The Finance Minister
and her team have been conducting hectic parleys with the various stakeholders
on Union Budget expectations. Here is what the capital markets would broadly be
the reforms process
Any capital market
expectation starts off with the reforms process. Despite the upcoming state and
general elections, the FM must sustain the reformist tone of the Union Budget.
That means, focus must be on market-friendly reforms, on cutting down the fiscal
deficit, reforms on the banking and financial sector front as well as greater
reforms on boosting investments into India. Being the last full budget, the FM
has to ensure that the focus on reforms is not lost.
This has been a contentious
issue over the last few years. Now, dividends on equity shares as well as
dividends on mutual funds are being taxed at the peak rate. This amounts to
double taxes as dividends are a post-tax pay-out to the shareholders. One thing
the Budget is considering is to shift the incidence of buyback taxation on the
investor, which is a good move. However, in that case, the taxes on dividends
must be also reduced to comparable levels. Budget 2023 is expected to take
steps in this direction of making dividends more tax friendly to investors. The
Budget can at least start off with equity mutual funds.
At the outset,
demands for scrapping of STT on equity transactions are largely out of sync
with reality. It is generating nearly $3 billion for the government and is
unlikely to go away. While the short term capital gains tax is acceptable, it
is the flat LTCG of 10%, that is the main issue. According to government
reports, the LTCG has not been contributing in a big way to the coffers. Also,
the STT was introduced in lieu of LTCG, so there is no justification to bring
back LTCG when STT still exists. Also, long term gains on MFs has a negative
impact on financial planning and long term wealth creation through equity
funds. That is something the budget must address, and, it is also very likely
worthwhile for FPIs
One major concern in the stock market in the
last year and half has been the incessant FPI outflows. However, there are
certain steps the government can take to stem these outflows. The FPI
empanelment process can be simplified to a great extent to attract fresh FPIs
into India. Secondly, the contentious issue of retrospective tax is still a
major overhang for the FPIs. While specific issues like Vodafone have been
resolved the issue is still open. Today, India has to compete with other EMs
for global funds. The inclusion of Indian bonds in the global indices is
pending. A move in that direction would certainly help!