The Budget held out the promise of spurring consumption but investors were left with heartburn after riding the fine print
Indian markets had a rollercoaster ride on Friday, after the budget. A number of populist measures were announced but how they will be funded is a question that the market was left wondering. If anything, the budget has dropped speed breakers in the path of the market.
The markets digested the farm sector relief easily, where the finance minister announced he would be spending Rs 75,000 crore on direct payments to small and marginal farmer. Then, it got very excited at the exemptions given to taxpayers. However, the fine print spoilt the market’s party spirits. In fact the fine print reveals the markets may face more pressure going forward.
The interim budget gives a road map for the final budget to be presented by the newly elected government in July 2019. Populist measures announced by the finance minister are unlikely to be withdrawn. In fact, chances are that many more schemes may be announced in the run-up to the elections and implemented in the budget. Keeping a check on the fiscal deficit will be the last thing on a new government’s agenda.
Interest rates and FII money, the key drivers for the market are likely to be affected in the immediate future. The government has given away nearly Rs 1 lakh crore by way of farm relief and salary exemption up to Rs 5 lakh but the cost of financing this could add pressure on the market.
There is a sharp jump in the government’s borrowing program. Against an expectation of Rs 6.50 lakh crore, the government is expected to borrow Rs 7.60 lakh crore. Bond markets reacted negatively to this news flow, and so did banking sector indices. The NSE Bank Nifty was down by 209 points, down by nearly 450 points from its high.
The likely rise in interest rates on account of higher borrowing by the government can affect all rate-sensitive sectors of the economy and not just banking stocks. Rising interest rates can also affect the currency market. Both in turn could be viewed as negative factors by foreign investors.
The inflow of Rs 1 lakh crore in the hands of consumers can to some extent benefit consumption. Consumption stocks rose after the tax exemptions and farm sector benefits were announced, but in the medium to long term, the benefit could be taken away by higher interest rates. The same logic goes for the automobile sector. However, the two-wheeler segment may gain to some extent on account of tax exemptions.
The biggest beneficiary from the budget is the real estate sector as it has been given direct as well as indirect benefits. Notional rent on the second self-occupied house has been done away with, while the TDS threshold for rent has been increased from Rs 1.8 lakh to Rs 2.4 lakh.
Rollover of capital gains for section 54 to be increased from one residential house to two residential houses (for capital gains up to Rs 2 Crore). Also, for affordable housing — deduction to real estate developers has been extended by one more year. Finally, builders have been given some relief by extending their exemption (notional income) on unsold inventory from one year to two years. No surprise then that the NSE Realty sector was up by 1.25 percent during the day.
One sore disappointment is that there was nothing in the budget that would directly benefit equity markets. All demands from the sector to the finance minister, especially withdrawal of long term capital gains and withdrawal of Statutory Transaction Tax (STT) has been ignored. Now, the Street will hope that July brings better tidings.Till then, expect a bumpy ride ahead.