Indian stocks trade at a premium of about 45% compared to emerging market peers, which means investors are banking on big reforms to drive the high earnings growth expectations they have from Indian companies. If anyone was looking to the budget to fulfill these hopes in a jiffy, they would definitely be disappointed.

If there were hopes of driving growth through higher spending on infrastructure, those came undone too. And the expectation that the finance minister will manage to walk the fine line ensuring fiscal discipline as well as making room for expenses necessary to drive growth was not met either. The lack of urgency in fixing India’s growth problems is a worry. True, the bank recapitalisation and the little financing leeway for non-banking financial companies will help improve credit, but there isn’t much more to write home about in terms of a strategy to drive growth.

As far as equity investors go, they were instead hit by a series of negative news. Foremost was the large increase in taxation of the super rich by about 9-20%. These high net worth individuals are large investors, and the high increase in taxation in their case will naturally result in lower investments, which is a negative for the markets.

While the government may say that the increase in taxation applies to only a small proportion of taxpayers, the fact remains that this small set of individuals is also responsible for large flows into the market. Besides, the higher taxes essentially also mean higher capital gains tax for these high net worth individuals; leave alone a relaxation in the capital gains tax some market participants were hoping for.

Another worry was the proposal to increase public free float by asking promoters to reduce shareholding to 65%, from the current mandate of maximum 75% holding. Shares of companies such as Tata Consultancy Services Ltd and Wipro Ltd fell about 4% on worries about a correction in valuation with an increase in the supply of shares. Of course, this is still at a proposal stage, and the markets regulator has in the past given a few years for companies to comply with minimum public shareholding norms. Even so, a large increase in float means Indian equities may not enjoy the same level of valuation premium they did with a lower availability of stock.

The fine print had some surprises in store as well. Stock buybacks done through stock exchanges will now attract capital gains tax; they were exempt earlier. Many companies used this route to return cash to shareholders and avoid the onerous and multi-level dividend taxes. With buybacks also getting taxed, post-tax returns of equity investments would get impacted negatively. The saving grace, here, of course is that gains will only be calculated compared with prices on 31 January 2018, rather than on the date of acquisition of shares.

Coming back to the fiscal position, while the budget foresees a deficit of 3.3% of gross domestic product (GDP) in FY20, hardly anyone is convinced by that number. After all, even though it has brought down its revenue estimates from the goods and services tax to seemingly reasonable levels, its overall tax revenue estimates envisage an increase of as much as 25% over the net tax revenues received in FY19. Note that net tax revenues had risen merely 6% in FY19 over FY18. To expect them to suddenly jump 25% seems foolhardy.

Of course, there are additional taxes, duties and cesses on the rich and on commodities such as petrol and precious metals to try and fill the shortfall, these will clearly not be enough. In fact, some experts worry about the inflationary impact of these additional taxes, which could impact the interest rate cycle.

On the positive side, there were a number of market development measures mentioned in the budget speech, with a view to increase foreign flows as well as domestic flows into capital markets. While some of it, such as the plan to deepen the corporate bond markets, have been heard about before, it will be heartening to see concrete action follow the budget announcements.

While these long-term measures must be cheered, it’s unfortunate that the budget didn’t include enough provisions to kick-start growth in the near term.

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