Despite a massive drop on the day of the Union Budget 2020, the movement in broad stock market over last few days reveals that the budget is likely to be supportive for your equity investments. The budget it is likely to push forward the growth agenda with the three themes of aspiration, development and compassion would become the pillars of strong and sustainable growth of the country. Highlights of budget include sustained focus on the agriculture sector, infrastructure, medium and small industries and on offering a boost to consumption and investments. While the local equity benchmarks tanked on the day Union Budget 2020 was announced, the broad undertone in the equity market over last two weeks has been supportive and indices have recovered from the hefty losses comfortably. Domestic benchmark indices recorded their biggest budget day fall in a decade as Finance Minister Nirmala Sitharaman presented the Union Budget 2020-21. The 30-share benchmark S&P BSE Sensex shed 2.5% and the NSE Nifty50 lost 2.32% on 1 February 2020. The sell-off was not restricted to large caps. The S&P BSE Midcap index declined 2.32% and the S&P BSE Small-cap index fell 2.35%. Even the indices capturing sectors such as FMCG, PSUs, metals, realty and banks tanked.
The Indian economy is going through a rough path. The real GDP growth rate slipped to a six-year low of 4.5% in Q2 of the fiscal year ended March 2020 (FY 2020). Investors were hoping for the budget to provide a fiscal stimulus. Instead of short-term measures to boost activity, the budget presented a roadmap in the road to a US$ 5-trillion economy. Another contributor to dampening the market mood was the plunge in the US markets overnight. The Dow Jones Industrial Average index lost 2.1% on 31 January 2020, the largest drop in 12 months, on fears that the acceleration in the spread of coronavirus. This also weighed on the sentiments, steepening the slide for local stocks.
The retention of the long-term capital gains (LTCG) tax on equities was also a negative factor for the market. Then Finance Minister Arun Jaitley in the budget for 2018-19 had reintroduced LTCG at the rate of 10% on gains accrued from transfer of listed equity shares exceeding Rs 1 lakh, without any indexation benefit. The comeback of LTCG should have paved way for the abolition of the securities transaction tax (STT) due to the double taxation impact. Not only was LTCG retained but there was no move to scrap STT.
However, the finance minister heeded to complaints of another instance of double taxation. The dividend distribution tax, of 15% plus surcharge and cess, is on the portion of profit that is left after being taxed. To partially make up for the Rs 25000-crore loss of revenues, the tax-free dividends in the hands of the recipients would be taxed at the applicable slab rates of the individual receiving the largesse. As a result, those in the highest tax bracket would end up paying more than 40% tax including surcharge and cess.
Bearing these critical factors, the budget rekindled the long term growth agenda fairly well. A clear takeaway from the budget is the Rs 103-lakh-crore National Infrastructure Pipeline (NIP) which will provide momentum for the infrastructure projects such as railways, metros, roadways and other forms of transportation, boosting infrastructure growth across the country. The local market went up impressively on these cues with the benchmark NIFTY 50 index jumping around 4% in two weeks following the budget. The broad market indices like Nifty 100 and Nifty 200 have also clocked similar returns, underlying the positive sentiments in the market.
Union Budget tends to have a sizeable impact on the stock markets and investors tend to view it as a very critical event impacting their equity investments. However, it is not ideal to analyze the performance of your stock market investments not on the basis of the immediate reaction to the budget. It is always advisable to wait for a few days for the market to absorb the various aspects of the budget and let the stock prices align them in tune with the changing dynamics in economy, global markets and policy steps. For instance, in the two weeks after the budget, while the Nifty 50 has surged around 4%, sectoral indices like Financial Services, Pharma, Metal, Energy have delivered more returns, highlighting their attractiveness. In short, while the budget has its share of hits and misses, the local stock markets have rebounded after taking a drubbing on the budget day and seem to be finding the long term growth agenda quite fulfilling. This is beneficial for equity investments in blue chip companies.
Performance of Major Indices Post Budget