Mumbai: Like most others, heights make operators in the Indian stock markets nervous. With India’s two benchmark indices, the Bombay Stock Exchange’s (BSE) Sensex, and the National Stock Exchange’s (NSE) Nifty testing never-seen-before highs in 2007, most players in BSE and NSE have just one question regarding Budget 2007: How will the finance minister make inflation fall to below 5% without hurting the economy’s growth?
Other provisions of the Budget, such as ones that deal with direct and indirect taxes will matter too, but there is a growing feeling on the street that macro-economic signals emanating from the Budget will play the predominant role in deciding the market’s future.
“(The Budget) is vitally important both to the short and long-term future of the economy. If the government gets it right then inflation will subside and the country can look forward to a higher rate of sustainable growth,” said HSBC Global’s Robert Prior-Wandesforde and Manas Paul in a recent report. “But if it gets it wrong then the authorities risk adding extra fuel to an economy that is already showing clear signs of overheating.”
The market would also like the Budget to spell out the government’s plans for building infrastructure and for sectors such as agriculture, public health, and education. “Creating strong social infrastructure and uplifting the down-trodden would be a key challenge to the government and critical to long-term economic growth. We see an increasing focus on addressing these issues,” says a pre-Budget report released by broking house ASK Raymond James.
This growing emphasis on macro-economic factors as against typical concerns about duty cuts and tax concessions is a reflection of the market’s confidence that the government will not deviate from its liberal economic position.
“The Budget has evolved to become more than just a narrow tax and spend plan—it is now a work plan for the government for the coming year,” says a report from the Mumbai-based financial services firm Edelweiss.
In some ways, the market sees this Budget as more significant than previous ones; many market participants believe this Budget, a middle-of-the-term one for the ruling United Progressive Alliance, presents a last chance for the government to take tough policy decisions on privatization and further opening up of the economy before electoral concerns start playing a greater role. This will be the UPA’s fourth Budget; the 2008 Budget could be its last one in this term.
How investors react to Budget 2007 will also depend on what the Bill means for bond and commodity markets, and how it decides to treat investments in stocks and mutual funds from the taxation perspective. Players in the bond market, in particular, expect the finance minister to announce initiatives aimed at activating a dormant market in corporate bonds.
Stock market participants are hoping the finance minister will leave things as they are as far taxing their business is concerned. Some fear the government could tinker with securities transaction tax (STT) and Short Term Capital gains tax. STT was hiked by 25% last year. It currently is 0.125% on both buy and sell side transactions and the government is expected to earn around Rs4,000 crore this year through STT.
“The government may be tempted to increase STT further or increase short terms capital gains tax due to the spectacular gains in the stock markets this year,” said a broker who did not wish to be identified. “But it will be an unwise move. Stock traders are very sensitive to taxation on their business and could pull down the market considerably.” Mutual fund managers have their own gripe on STT: funds are taxed on individual units as well as underlying share purchases and they’d like one to go.
Any increase in the the existing ceiling of Rs1 lakh for tax exempted investments in equity linked savings schemes of mutual funds will have a direct impact on the way the stock markets behave (an increase would be welcome).
Asset management companies would also like fund-of-funds schemes that invest more than 50% of their corpus in equity funds to be treated as equity funds themselves, and some clarity on when commodity based funds and real-estate investment trusts will be allowed to operate in the country.
Traders in the commodity exchanges want the finance minister to treat commodity derivatives on par with security derivatives for tax purposes. Current tax laws allow trading losses in securities futures and options to be offset against gains for tax purposes; this is not permitted for commodities futures.
Commodities exchanges are also seeking tax concessions for intermediaries such as warehousing companies, grade assayers and collateral managers of agri commodities.