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7 pain points for stock markets from Nirmala Sitharaman’s budget

sensex, bse

By Amit Lalan

Finance Minister Ms. Nirmala Sitharaman, in her maiden Budget speech delivered on July 5th, spoke for the full 2 hours and 16 minutes, much longer than most FMs in the past have. By the time she finished, the markets had started to tank sharply. The Sensex on that day closed 400 points lower, but the pedagogic style in which the new FM delivered her Budget speech was something which wasn’t to be missed. On 30 occasions, she chose to repeat the same point twice, and at times even thrice, for greater effect. The novelty wasn’t just in her style of presentation, but there were also many points in the Budget that were also unique.

Essentially, this Budget is for the long haul. There might be some short-term pain but long-term gains are many more. The short-term pains The markets probably read too much into the short-term pains in the Budget. Here are some of these pain points, which rattled the markets on the day.

  • Corporate tax reduction from 30% to 25% was not extended to all companies but only to companies with turnover of up to Rs.400 crore. That did not go down too well.
  • To prevent avoidance of Dividend Distribution Tax (DDT) via buybacks, the Budget proposed considering buybacks of listed companies also for distribution tax at 20%.
  • The Budget  proposed SEBI to work on raising public shareholding limit for listed corporates from 25% to 35%. That would mean 1400 companies reducing their promoter holdings and a lot of float in the market.
  • No real relief in Income Tax other than what was given in the interim budget. Surcharge on higher income groups increased steeply to as high as 25%.
  • Markets expected a more generous approach to NBFC crisis. Instead, the Budget brought all HFCs under RBI regulation. Stressed NBFCs will still struggle for funds as the line of credit guaranteed by the government is only for healthy NBFCs.
  • The disappointment also came in the form of increased duties on petrol and diesel by Re.1, which will partially reduce the benefits of  lower crude prices for customers.
  • On the downside, the Budget will also deduct TDS of 2% on cash withdrawals that cross Rs.1 crore from a bank account in a financial year.

  • The long term gains

    The mood of the Budget was set by the projection of $2.75 trillion GDP by 2025. That is a good $2.25 trillion addition to the GDP over the next 6 years, putting the markets in a sweet spot. There were some long-term boosters for the markets too.

  • Pension benefit for MSME workers has been officially extended to retail tradersd shopkeepers, giving them the much needed social security cover.
  • The public private partnership (PPP) model is to be deployed for railway infrastructure. A credit guarantee scheme will be provided for easy funding.
  • MSMEs will get  a 2% interest subvention even as angel tax hounding will not happen for start-ups and investors who are fully compliant.
  • Budget has proposed duty exemption on certain EV parts as well as income tax deduction of interest on loans for EVs up to Rs.1.50 lakhs during the life of the loan.
  • Statutory limit for FPI investments will float with the overall sectoral limit.The Budget also proposed to merge equity investment rules for FPIs and NRIs.
  • Section 24 benefits on interest paid on home loans will be increased by Rs.1.50 lakhs per annum in case of low cost houses up to Rs.45 lakhs in value taking the effective exemption limit for such borrowers to Rs.3.50 lakhs.
  • Merchants will provide digital transactions like card payments, UPI etc at no cost. Such costs will be absorbed by the banks.
  • To simplify compliance, the Aadhar and PAN would be interchangeable. Effectively, persons without a PAN card can use Aadhar for tax filing and high value purchases.
  • PSU banks will be recapitalized to the extent of Rs.70,000 crore to make them more     competitive. This would be issued in the form of recapitalization  bonds.
  • The budget also announced an ambitious project to incubate a total of 75,000  small and medium entrepreneurs with the appropriate support for funding, technical skills and the right ecosystem.

  • To conclude: The Budget 2019-20 was a mix of short-term pain points that may have spooked the markets, but there are many long-term positives too, which shouldn’t be overlooked.

    The author is Director, Upstox. The views expressed are the author's own.