The day of reckoning awaits the record-breaking rally in Indian stocks when New Delhi unveils the annual budget in the coming week. The biggest threat to the bull run could emerge from new taxes, particularly on capital gains in stocks, the cash-strapped government may propose to bolster revenue shortfall.
Finance Minister Arun Jaitley is scheduled to present the budget in parliament on Thursday, which is expected to contain a liberal dose of populism aimed at calming rural anger, help raise farm-related incomes and create jobs. There will also be large investments in infrastructure and incentives for low-cost housing and small-and-medium businesses that have been hit by demonetisation and the launch of Goods and Services Tax (GST).
Government finances are in a tight spot and rising global oil prices have the potential to blow a hole in the coffers because the country imports about 80 per cent of the fuel it consumes. From the last quarter of 2014 New Delhi had benefited from the slump in world oil prices by pocketing higher excise levies on the commodity. The authorities are under pressure to lower the tax to soften the blow on consumers
Caught between the deep sea and a hard place Jaitley will have to find ways to raise revenue and ensure the fiscal deficit doesn’t balloon. With a clutch of state assembly polls coming up over the next few months and general elections due by May next year, it will not be easy and New Delhi will have to tread carefully about imposing burdens on voters
Tax worry
Given the circumstances there is a strong likelihood of taxing long-term capital gains (LTCG) in booming stocks after a gap of more than 10 years Currently, only short-term capital gains or profit made on stocks that were held for less than 12 months are taxed at 15 per cent, while stocks owned for more than one year are exempted from any tax on capital gains.
Market pundits say Jaitley could extend the holding period to three years to become eligible for exemption from taxes or possibly slap a 10 per cent tax on long-term gains.
“Tweaking the long-term capital gain break is a low hanging fruit,” Shefali Goradia, partner at Deloitte Touche Tohmatsu India, told Bloomberg.
However, there is a risk of spoiling the stock market party and halting a buoyant primary issue market that has helped the government sell stock for more than Rs900 billion, about double the amount from a year earlier. The target for divestments in 2018/19 is likely to be Rs1 trillion.
Voracious risk appetite among global and domestic investors on expectations that faster economic growth will feed into bigger corporate earnings has driven benchmark stock indices to all-time highs, with the rapid pace of gains making the market vulnerable to a sharp pullback if things don’t go according to plan.
It took less than a week for the top-30 Sensex to leapfrog from 35,000 to past 36,000, signalling an overheated market. Some market observers believe the government would not want to kill the golden goose and would likely pursue a middle path through moderate taxes.
“Although we believe that LTCG in some form will be introduced eventually, given that the government is grappling with larger issues like revival of growth, job creation, rural stress, et cetera, it is unlikely that a measure which dampens investor sentiment will be implemented in budget 2019,” ICICI Securities said in a note.
Growth, plans
The buoyancy in stocks got a shot in the arm after the International Monetary Fund raised its forecast for India’s growth to 7.4 per cent in 2018/19 and 7.8 per cent in the following year, from an estimated 6.7 per cent expansion in 2017/18. The latest update, released in Davos midweek, would make the country the fastest expanding major economy in the world.
Taken together with improving corporate results fund managers are convinced equities offer good opportunities for strong returns over a long period.
Prime Minister Narendra Modi’s robust pitch at the World Economic Forum in Davos to woo foreign investors, especially his aim to expand the size of India’s economy to $5 trillion by 2025, also fanned the bullish fervour.
“It’s really doable,” ICICI Bank CEO Chanda Kochhar told ET Now television channel on the target set for the economy, which currently is $2.3 trillion. “India is today going through a huge amount of financialisation and formalisation of the economy. We have added in the last 18 months Rs28 trillion to the financial savings in the country. That is huge … (and) a big enabler.”
The Sensex rocketed to a record 36,268.19 — beating the most optimistic forecasts for end-March — and closed at 36,050.44, up 1.5 per cent over the week. The benchmark, styled on the Dow Jones Industrial Average, has gained 5.85 per cent so far this month, adding to the 28 per cent rise in 2017.
The broader 50-share Nifty roared to an all-time high of 11,110.10 and ended at 11,069.65, rising 1.6 per cent. The gauge, which is mimicked by portfolio managers, has gained 5.1 per cent this month.
Global equity markets have also been on a roll since the start of this month, buoyed by better outlook for the world economy. “Risk appetite is now at its highest level on record, which leads to the question of what future returns can be,” strategists at Goldman Sachs said in a note.
“While high risk appetite increases risk of disappointment, we find historically that the signal from macro data tends to trump the signal from risk appetite,” they added.
Earnings
Some of the big earnings in the coming week are: ICICI Bank, Larsen & Toubro, Hindalco, Bajaj Auto, Indian Oil Corp, NTPC, Ashok Leyland, IDFC, HDFC, TVS Motor Co and SBI Life Insurance Co.
InterGlobe Aviation Ltd, the owner of IndiGo Airlines, the country’s biggest carrier, reported a better-than-expected 56 per cent jump quarterly earnings, as higher ticket sales revenue and credits received from manufacturers helped overcome increases in fuel costs.
Its shares jumped as high as Rs1,280 before closing at Rs1,235.50, up 2.2 per cent over the week.
The writer is a journalist based in India.
