Dalal Street has its own set of expectations. Investors want no tinkering of taxes levied on equity and equity mutual funds and are looking to a fiscal deficit target in the 5-6 per cent range.
A focus on capex revival would be crucial as would be any announcement on the formation of a bad bank, updates on production-linked incentives and some tweaking of individual taxes (income-tax cuts are likely for low income individuals, while a Covid cess is expected on the high-income individuals).
Here are five things that would rank high on investors’ minds as we head into the Budget.
No tinkering to tax on equity gains
The market is hoping that the government does not tinker with the taxes on equity and equity-linked mutual funds. The last couple of years saw the market react negatively to the long-term capital gains tax, introduction of taxation on buybacks and taxation on dividends at the hands of recipients.
“Stability in tax policies is in the interest of everyone, investors and businesses. I do hope that we do not make frequent changes there. If any changes are to be made, they should be planned well so that in the foreseeable future you do not change them again, because that makes life difficult for investors and businesses alike,” said Prashant Jain, Executive Director & Chief Investment Officer at HDFC Mutual Fund.
Bernstein said the government needs to raise resources to help increase spend, but equity markets would consider any form of tax increases as negative and would rather cheer tax cuts.
“The best way to raise resources this year is to accelerate divestments – equity markets are conducive enough to digest divestments of even PSU stocks. The disinvestment target could be pegged at $30 billion, double of that achieved in FY18/19,” it said.
5-6% fiscal deficit target: No less, no more
Investors want an expansionary fiscal deficit target, which would ensure the government does not cut on the spending, at the same time they don’t want it to be high enough that it stokes inflation.
For Girish Pai, Head of Institutional Equities at Nirmal Bang, it would be a good Budget if the government delivers a fiscal deficit target in the 5-6 per cent range. “If it is more than 6 per cent, it would be expansionary and probably lead to slightly higher inflation. If it is below 5 per cent, market would probably get worried whether there is a pullback in spending that the government is going to do, which is going to hurt growth. So, a 5-6 per cent fiscal deficit range is something that one is going to watch out for,” he said.
Capex revival, material
Bernstein said the government needs to peg a higher growth target for capex at around 30 per cent YoY for a meaningful impact.
“We see clear government intent to spend on capex. For instance, despite revenues materially lagging in FY21, capex cuts so far have been minimal i.e. 59 per cent of FY21 budgeted capex spent in April-November against 63 per cent. Working capital of contractors isn’t stretched with timely government payment. Besides, marquee orders such as High speed Rail have been awarded against expectation of being shelved,” said BoFa Securities in a note.
The government’s infra capex scaled up to 18 per cent of Budget expenditure in FY17-19 against 10 per cent in FY14. But slower economic growth and stretched fiscal in FY21 has made it to scale down to 16 per cent in FY20 and FY21.
“Plans for expansionary fiscal policy and continuing trend to cut subsidies as a percentage of Budget spends, seen over FY13-20 (down from 15 per cent to 8 per cent), could set the stage for the government to push infrastructure capex back to 18 per cent of Budget spends,” BofA Securities said.
Covid cess, formation of bad bank
Centrum Broking said a definitive decision on whether the Covid cess levy will be in the form of cess or surcharge is likely to be monitored. It expects the cess to be levied on high-income individuals only. BofA Securities, on the other hand, sees a high possibility for tax cuts for low income groups to boost consumption.
“The idea of setting up a bad bank to resolve the growing problem of NPAs is likely to be addressed in the budget. Various news reports suggest that the government is most likely to propose an establishment of a bad bank with its own set of regulations so that bankers can devote more time to the flow of credit instead of only trying to recover legacy bad loans,” Centrum Broking said.
PLI scheme, bank recap, realty booster
Bernstein said there will be attempts to garner private funding for infrastructure spend, and policies to help protect downside for private sector investments.
“We also expect the government to share a bit more on the PLI scheme announced earlier, although it has limited capex impact. Allocations for support to scrappage policy for Autos is likely,” it said.
BofA Securities said sops to spur real estate demand and recapitalisation of PSBs by 0.25-0.5 per cent of GDP via non-fiscal levers such as recap bonds (Rs 20,000 crore and/or use of $125 billion RBI revaluation reserves are all likely.
An expansion in MSME credit guarantee scheme and structural reform in the form of breaking large government monopolistic sectors and/or introduction of private competition as outlined under the PSU policy in May 2020 would be keenly tracked, Bofa Securities said.