Budget 2023: Investors eye rationalization of holding period of equity, property & bonds

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budget 2023
Financial market outlook

Being a pre-election budget, the usual contemplation is that it will be populist. When the nation’s economic engine slows down and its daily schedule gets dramatised, it does have a negative effect on the stock market.

The domestic market is pessimistic so far in January compared to the improvement in the global trend. A retrospective check of the pre-election budget of 2018 reveals a volatile stock market in Q1CY18.

We had a pre-budget rally in January 2018 and then a post-budget fall till March 2018. The market had rallied in anticipation, but a neutral event led to the correction.

The focus area of the 2018 budget was agriculture and rural economy. An important announcement for industries was the reduction in corporate tax to 25% for companies with a turnover of less than Rs 250 crore.

The introduction of 10% long-term capital gains tax (LTCG) on equity and mutual funds, which was rationally expected in the future, was the most detrimental.

The 2018 budget was intended to improve the livelihood of rural households by increasing the income of farmers by 50% more than the cost of production by 2022.

Measures were to increase MSP (minimum support prices), expansion of warehousing, micro irrigation, and credit growth.

Other instruments were to build houses for the needy and provide LPG, and electricity through Prime Minister Awas, Ujjwala, and Saubhagya Yojana schemes. On average, MSP was increased by 13% in FY19. Post that, the average increase is 4% in FY20 to FY22.

Outlook for Budget 2023:

On a rational basis, we can expect a similar strategy in the 2023 budget with a focus on the rural market.

MSP is expected to increase above the long-term average in FY24, which is also a need of the hour as farmers are burdened by inflation. The rise in welfare expenditures, including focus on healthcare schemes, will be reflected in the higher budget outflows.

However, the deficit target of 6.4% for FY23 is estimated to be achieved and forecasted to be cut to a range of 5.5% to 5.9% and gradually to the long-term mandate of 4.5%.

Producing a populist budget is not the concern of an advancing stock market. Well, the enlarged economy, has transformed the budget into a periodic publication of the government’s financial statement and announcement of ongoing and future outlooks.

The fact is that remarkable measures and perspectives are developed outside the budget forum and are continuously incorporated into the market.

As a consequence, the long-term trend of the stock market cannot be spoiled by short-term blips. The near-term focus of the government and the economy may shift to election tactics.

But the long-term reforms undertaken by India are non-reversible. In fact, it has started having a trickle benefit on the economy, and if the stock market corrects, it will be used as an opportunity to buy by the investors.

India is receiving the highest-ever inflows of FDIs, despite the pandemic and global slowdown issues.

Jan Dhan Yojana and tax reforms have improved the efficacy of government spending. The total subsidy cost of the government is expected to reduce as a percentage of total budgeted layout.

On a positive note, the government is expected to maintain the growth of total expenditure, which will be exclusively positive for FMCG and agriculture.

Regarding capex, the government is expected to increase by 25% to Rs 9.5 trillion. The growth will look slower compared to the 35% done in FY23 to support the pandemic-hit economy.

But it is big accounting for above 20% of the total budgeted layout, a boost for infrastructure.

Industry-wise, the focus of the government will be on infra, housing, power, defence, and manufacturing. The government may look to provide support with tax sops. MSMEs could be an important theme and enhancement of PLI schemes.

The common man, stubbed by inflation, is expecting relaxation in direct tax by increasing the zero-tax slab. An increase in tax exemption is unlikely as the government intends to simplify the tax structure without exemptions.

From a stock market point of view, rationalization is expected in the long-term capital gain tax and holding period of equity, property, and bonds.

The current tax and holding period of equity is 10% with 1-year period while for property and bonds is 20% with two and three years, respectively.

An increase in the equity’s holding period will be rationally accepted, however, an increase in rate will have a negative effect in the short-term.

First published in The Economic Times

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