Will Budget 2023 Impact the Stock Markets

Do Union Budgets really impact the equity markets or the stock markets? In a sense, it is a mix of direct impact and an indirect impact The impact of budget on stock markets can be either long term or short term, while the budget effect on share market can be felt immediately or over a period of time. Here we look at the union budget impact on stock market, more from an outcome perspective. For instance, macro level changes or shifts may not impact stock markets directly but tend to be long term accretive. Here we specifically talk about the budget effect on share market 2023.

We will dwell upon the union budget 2023 effect on stock markets through some very simple questions. Based on early estimates it does look like the budget impact on stock market 2023 should be value accretive. But a lot will still depend on what the actual budget provisions pertaining to capital markets are?

1. Will the Budget 2023-24 curtail fiscal deficit?

How will lower fiscal deficit matter to stock markets? You would be surprised, but it has been one of the most important drivers. It is likely to boost markets if fiscal deficit is perceptibly lower in FY24. A lowering of fiscal deficit from 6.4% in FY23 to 5.8% in FY24 would be a boost for markets. This is likely to be welcomed by foreign portfolio investors (FPIs), global passive funds and even rating agencies. Markets would be more impressed if this cut in fiscal deficit is done without compromising fiscal push to areas like agriculture, infrastructure and PLI incentives. For the budget to be credible, it must offer proper fiscal solutions on the revenue side like monetization of assets, divestments and sweating assets. There will certainly be a premium on fiscal prudence.

2. Will Budget 2023-24 announce a big boost to infrastructure?

Infrastructure has been a silent force multiplier for markets. Back in 2003, the multi-year bull market (2003-2008) got its first infrastructure boost when the 2003-04 budget announced a Rs75,000 crore outlay for the Golden Quadrilateral. Over the years, this has been a major game changer for Indian business and trade connectivity. Stock markets will look for focused infrastructure investments in roads, highways, port upgradation, increased air connectivity, freight corridors, railway network efficiency, power infrastructure and EV infrastructure. These can go a long way in creating the feel-good factor.

3. What to expect from the budget on disinvestments?

Will the Union Budget 2023-24 be aggressive on disinvestments or conservative like in previous budget. For a country like India, the budget must target closer to Rs2 trillion a year rather than Rs60,000 crore a year through disinvestments. The government had missed divestment targets for two years and it is playing safe, but that is hardly the answer. Disinvestment bring in quality PSU paper into the market and obviates the risk of too much money chasing limited paper. The government has successfully sold a minority stake in LIC, sold Air India to Tatas and is now hiving off IDBI Bank. This should convince the government that divestments and strategic sale are workable, if designed properly. Government must also take a relook at monetizing future cash flows and sweating assets more aggressively.

4. Will the budget put more money in the hands of people?

What do we mean by putting more money in the hands of people? It is about giving people more purchasing power and more investable surplus, but how to do it? A simple way is to cut GST on items of mass consumption. This boosts the household budget and puts more money at the disposal of people Other popular ways are to cut the rates of income tax, or to enhance exempt income levels or to raise the tax-free exemptions from popular sections like Section 80C, Section 80D and Section 24. Another way to do it is to focus on higher income groups where the tax rates can go to a peak of 43-44% including surcharge and cess. That is 10-15% higher than global peak rates. A reduction in peak rates creates premium purchasing power and investable surplus; that can be value accretive to markets.

5. Is the budget likely to be FII friendly?

What do foreign portfolio investors (FPIs) want from the budget? In 2019, when the government cut tax rates for corporates to 15%, it resulted in a surge in FPI interest in the stock markets. There are also procedural things that can be ironed out. The onboarding process for FPIs can be made simple and bureaucracy can be crunched. The Union Budget must give explicit comfort to FPIs on retrospective tax front. It is going on endlessly, without positive outcomes. Government must meet half way in enticing global passive bond investors by pitching for inclusion in global bond indices. Special tax breaks is worth the risk.

6. Will government schemes incentivize high growth sectors

How can the Union Budget trigger stock market excitement through policy announcements? In the last few years, a value accretion gravitated towards new age ideas like green energy, digital shift, electrical vehicles, renewable equipment, data centres etc. The more the government encourages these sectors, greater will be the outcome on innovation and value creation. Apart from spending on infrastructure, there is the PLI scheme that can be tweaked. Production Linked Incentive (PLI) scheme has consistently helped in directing action to critical high growth sectors. Recently, PLI outlays for defence and textiles led to a surge in investor interest in these areas and that is evident in stock market performance. A very focused sectoral matrix for incentives can go a long way in boosting the stock markets.

7. What can the budget 2023 do for IPO markets?

The last 3 years have been a mixed bag for IPO markets. First we had the rise of unicorn and decacorn IPOs with the likes of Zomato, Paytm, Nykaa, Policybazaar and Delhivery. However, most of them underperformed post listing and that actually backfired and held down the entire IPO market enthusiasm. Most cases have been issues of overpricing and that is outside the purview of government policy. However, the Union Budget can offer special incentives in the budget for IPOs so that the primary market can be revived. IPO investments can be offered a special time-bound tax break. These can be across the board or targeted at specific sectors. Since the retail success of IPOs depends on proliferation of demat accounts, government can offer incentives similar to zero-balance accounts in banks. The budget can make provisions for a small subsidy to boost equity cult in India.

8. How will budget handle LTCG and STCG tax on equities?

There have been demands to scrap the LTCG tax on equities to boost participation. That would be a good move since contribution to revenues is minimal. Also, the budget can meet half way by raising the long term limit to 3 years for full exemption of LTCG tax on equities so that long term wealth creation and financial planning is not impacted. Also, to encourage market participation, even STCG can be given a blanket exemption limit of up to Rs1 lakh per annum from tax.

9. How will Budget 2023-34 handle tax on dividends and buybacks?

Scrapping tax on dividends would be ideal since it is double taxation. At least, the budget can start off by reducing tax on dividends to flat 10% above a threshold. That will save small investors from the hassles of dividend tax and TDS claims and refunds. Also, the buyback tax must be shifted to the investor. This will not only entail lower tax, being capital gains, but it will also be equitable. That is because, unlike in the current system, the non-participating shareholders will not have to bear part of the tax burden.

10. Will the budget scrap STT to boost markets?

Securities transaction tax (STT) contributes nearly $3 billion to the government revenues and it is growing. Expecting the government to scrap that would be impractical. If the LTCG tax is lowered, that may be good enough and STT can be allowed to continue. However, one area where the budget can act is to exempt equity mutual funds from STT since the STT has already been paid at the time of the equity transaction and this becomes dual taxation.

Not all of them are practically possible withing budget constraints. Even if the government can manage a few of these changes, it will be a blessing in disguise for stock markets.