Opening up of certain categories of government securities to NRI investors and hiking the FPI investment limit in corporate bonds will help deepen the bond market.
More than 2 centuries ago, Adam Smith, the father of Economics, wrote that an essential canon of taxation should be simplicity. Budget for FY21 goes against this basic principle of a good tax system. It has made the Personal Income Tax regime unnecessarily complex by introducing an optional tax system with 5 tax rates and no exemptions.
Budget 2020-21 is built on 3 major themes of Aspirational India, Economic Development and Caring India. The nominal GDP growth rate of 10 percent for FY21 is achievable. Actual fiscal deficit, including off-budget borrowings, would not be 3.8 percent and 3.5 percent, respectively, for FY20 and FY21 as reported, but 4.5 percent and 4.3 percent, respectively.
The FM has attempted to stimulate the rural economy through some major schemes like Sagar Mitra, Kisan Rail, Krishi Udaan, Solar pumps and Jal Jivan Yojana. Agriculture has been given an allocation of Rs 2.83 lakh crore, Rs 99,300 crore for education and Rs 69,000 crore for the health sector. Rs 1.7 lakh crore has been provided for transport infrastructure. 100 new airports are to be built by 2024. This will be a major boost to infrastructure development.
From the market perspective, a positive is - the abolition of dividend distribution tax (DDT) paid by companies. However, dividends will be taxed at the hands of taxpayers at the applicable tax rate. This is a clear negative from investor perspective. Highlight of the Budget is the proposed IPO and listing of LIC.
The proposed sale of government stake in IDBI bank takes the liberalization of financial system forward. The 100 percent tax concession to Sovereign Wealth Funds for investing in infrastructure projects is a clear positive from the market perspective. Opening up of certain categories of government securities to NRI investors and hiking the FPI investment limit in corporate bonds will help deepen the bond market.
The disinvestment target of Rs 2.1 lakh crore appears ambitious, particularly in the context of the dismal performance of disinvestment in FY20.
Income tax payers will get marginal benefit if they opt for the new IT regime with lower taxes but no exemptions. Under the proposal, tax rates on different income slabs would be: 10 percent on Rs 5-7.5 lakh income; 15 percent on Rs 7.5-10 lakh; 20 percent on Rs 10-12.5 lakh; 25 percent on Rs 12.5- 15 lakh and 30 percent on above Rs 15 lakh. The new IT regime co-existing with the old regime will make the IT system unnecessarily complex. The new lower rate IT regime without exemptions is a negative for mutual fund schemes like ELSS.
The stock market was disappointed that the expected tweaking of the LTCG tax, which would have boosted sentiments substantially, did not materialize. The government missed the opportunity to attract long-term funds with very low tax sacrifice.
The impact of the Budget on the market will not last for more than a few days. Soon the market will start responding to fundamentals. Investors can utilize the correction in the market to buy quality stocks in performing sectors like private sector banking. The mid-to long-term trend of the market will depend on capital flows and the recovery in economic growth and corporate earnings.
(The author is Chief Investment Strategist at Geojit Financial Services.)Disclaimer: The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.