Eq­ui­ties As an As­set Class is All Set to Shine

Mas­sive cap­i­tal in­flows could keep the mar­ket in good spir­its EX­PERT TAKE

The Economic Times - - Front Page -

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.

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