Budget 2017 has been one of the most anticipated events in the recent times, for the economy has been struggling to reach its potential growth due to a number of events (both internal and external). Amidst anticipations of either an “austere budget” or a “populist budget”, the government has struck a balance between the two without evading prudence.
It must be acknowledged that the government has done a commendable job on the fiscal front. The government has been able to restrict the fiscal deficit to 3.5% for the year 2016-17, which can be attributed to the increase in tax revenues (both direct and indirect). Reduction of personal income tax rate from 10% to 5% for the income slab 2.5 lakh to 5 lakh is something to rejoice for the common man. The net loss of 12,800 expected to be incurred due to this cut is expected to be mitigated through an additional surcharge of 10% for earnings between 50 lakh to 1 crore. On a major setback for the corporate sector, the corporate tax rate was not reduced to 25%. Instead such a reduction has been introduced only for companies of turnover up to 50 crores. Also no heed was paid to clamours for abolition of MAT (minimum alternate tax). At the same time investors have been relieved of any further tax on capital gains. Schemes and initiatives targeting farmers, the rural poor, youth also have got a major boost.
The budget had a positive impact on the stock market as a whole catapulting Sensex and Nifty by 485 and 155 points respectively. Maintaining status quo on long term capital gains and refraining from increasing the Securities transaction tax have helped in boosting the investors’ confidence. The sectors that have visibly gained from the budget include FMCG and LNG.
The reduction in the personal income tax and increased allocation to “MGNREGA” is expected to increase the aggregate demand. The expectations of increase in consumer demand and the proposal for abolition of “FIPB” have given a fillip to FMCG sector. Major stocks which pulled the FMCG sector include ITC and Emami. ITC recorded a 5% increase in the stock prices in 2 days, while Emami climbed by 10.91%. The reduction of customs duty of LNG to 2.5% from 5% and proposal to create an integrated public sector oil major are shots in the arm for the LNG sector. Stocks of BPC (Bharat Petroleum Corporation) and GAIL (Gas Authority of India Limited) have reflected this through an increase of 3% (approx.) and 2% (approx.) respectively in two days.
Banks can now deduct provisions made for NPAs up to 8.5% of total income for tax purposes, earlier this was 7.5%. This is expected to give room for the public sector banks to provide credit. On the other hand proposed infusion of 10,000 crore to the banking sector may prove to be inadequate. The push to affordable housing could benefit the banking and housing finance companies. The major stocks that recorded a gain in this sector include Muthoot Finance, SBI and ICICI, each recording a gain of13%, 4%, and 5% respectively.
With the stock market taking the cue from the budget, there is no ideal time than now for those who are looking forward to invest in stock markets. A rising tide lifts all the boats, goes the saying. Here the budget has lift stocks across sectors. A prudent investor can easily make returns ranging from 7% – 15% in less than six months, which is much better than the returns from FD. With the economy poising for a robust growth, stock market is turning out to be a reliable destination for investors.
By: Thomas Dominic