Equities As an Asset Class is All Set to Shine
Massive capital inflows could keep the market in good spirits EXPERT TAKE
EVERY YEAR, the stock market looks forward to the Budget with hope, but for Budget 2017-18, perhaps the over-riding emotion was fear. The Budget is sandwiched between demonetisation and crucial state elections. Given this, the markets feared that it may end up as more populist, less prudent. H o weve r, to the Finance Minister’s credit, Budget 2017-18 stays true to the current central theme of the government — formalisation of the economy. The key measure in this direction is the abolition of all cash transactions above ₹ 3 lakh. This single move deals a body blow to two major asset classes in India where cash is rampant — real estate and gold. In contrast, equity market is fully formal, and hence, should increasingly attract higher share of financial savings.
The Budget does yet another major favour to the equity markets — no needless tinkering with policies and taxes. Thus, capital gains norms for equities and mutual funds remain untouched, belying market fears. Likewise, most indirect tax rates have been maintained, and corporate tax is actually 5% lower for companies with a turnover less than ₹ 50 crore.
Equity markets also respond to macro-economic issues. Here too, the Budget makes all the right noises. For FY17, fiscal deficit has been maintained at the budgeted level of 3.5% of GDP on the back of a 17% growth in tax revenues. For FY18, the assumption for tax revenue growth is a modest 12%, given the first year of GST. Still, fiscal deficit is expected to improve to 3.2% of GDP, with a commitment to lower it further to 3% in FY19.
As a result, inflation is expected to stay low, creating headroom for further interest rate cuts — a huge positive for valuations to stay buoyant. Measures such as abolition of FIPB (Foreign Investment Promotion Board) and consolidation/listing of PSUs also strike a favourable, pro-reform chord with the markets. Good economics must make good politics too. The Budget scores here with a slew of measures for farmers, the poor and the middle class, including 5% tax relief in the lower-income bracket. Bringing greater transparency to political funding will also go down well with the electorate. Two areas where the Budget could have done better are PSU disinvestment (FY17 proceeds of ₹ 45,500 crore missed the target of ₹ 56,500 crore), and Innovative revitalisation of PSU banks (the Budget merely provides ₹ 10,000 crore for recapitalisation).
All-in-all, in the near term, expect market mood to be upbeat on the back of massive capital inflows (read, elevated P/Es). For the party to last really long, one important guest will need to join in at the earliest — ear nings growth.