Forbes India 15th Anniversary Special

Stock markets give thumbs up to Jaitley's Budget, gain near 2%

But this could be a "relief rally", according to experts

Salil Panchal
Published: Feb 1, 2017 04:21:45 PM IST
Updated: Feb 1, 2017 07:26:28 PM IST

Stock markets give thumbs up to Jaitley's Budget, gain near 2%
Image: Danish Siddiqui/ Reuters
India’s stock markets gave a thumbs up to the 2017-18 Union Budget presented by Arun Jaitley on Wednesday, with the benchmark 30-share Sensex Index jumping by 1.76 percent or 485.68 points to close the day at 28,141.64, applauding what some have called a “growth-oriented” budget.

But, experts who Forbes India spoke to, say that the spike in stocks is only a “relief rally”. Investors and market experts started to breathe a lot easy only when Jaitley ended his over-two-hour budget presentation. Through much of budget speech, the major indices moved in a tight range, fearing the worst.

Only when there was no reference (and even in the fine print) relating to changes on long term capital gains tax relating to equities, did the stock markets start moving up in early afternoon trade.

Further, Jaitley pegging the fiscal deficit target at 3.2 percent of GDP for the next fiscal year, which was largely in line with expectation from economists and analysts, also aided investor sentiment.

Auto, bank and infrastructure stocks were among the main gainers, in the form of Mahindra & Mahindra, Maruti Suzuki, ICICI Bank, State Bank of India, Adani Ports and Tata Steel. 
Over the past week, some analysts and media houses had speculated that there was a strong chance of a rejig to the long term capital gains (LTCG) tax structure in the latest budget. But Jaitley did not oblige which the markets clearly cheered.

Thus the long term capital gains tax on equities will remain nil, if the investor holds the investment for a period of over one year. A shorter tenure of investment attracts a tax of 15 percent, in the form of short-term capital gains tax.

Any tinkering to the LTCG at this stage would have been a huge dampener for the stock markets. While macroeconomic conditions remain unclear, the pace of growth for India’s economy has slowed in recent quarters. A day prior to the budget, the Economic Survey 2016-17 tabled in Parliament projected an economic growth of anywhere between 6.75 percent and 7.5 percent of the gross domestic product (GDP) for the 2017-18 fiscal.

Also, in the post-demonetisation phase, there is little clarity on how the government will help revive consumption demand, credit growth and rural spending. With corporate earnings also still to pick up, any new development – such as the LTCG tax – would have hit investor sentiment hard.

“The apprehensions (relating to LTCG tax) were absent and that was a positive,” said Shanti Ekambaram, president (commercial banking), Kotak Mahindra Bank. “This is a direct and responsible budget,” she told Forbes India.

Gautam Trivedi, managing director and CEO of Religare Capital Markets, felt that “the government could have been bolder” in its approach to deal with boosting consumption and helping capital formation. “What we are seeing is a relief rally at the stock markets,” he added. Trivedi said the fundamentals of the economy are sound and demonetisation was behind us, which are also factors which have led to an improved stock trading sentiment.

Anshu Kapoor, head of Edelweiss Private Wealth Management, called this budget a “growth-oriented budget”. “The intent is to kick-start growth, beginning with public spending, followed by consumption pick-up and eventually corporate investments. The government is acutely aware of the challenges posed by faltering global trade and political developments (around de-globalisation).”

M. Murali, Managing Director, Shriram Properties calls this a well balanced. mixed and a progressive Budget coming in the wake of series of reforms which aimed at increased transparency, elimination of corruption and growth of digitalisation. “The budget reflects the efforts of the Government to continue the reforms, yet, keeping in mind the welfare of the weaker section of the society. Focus on farmers and rural spending to encourage rural employment is most welcome, as India being basically an agrarian economy. Granting infrastructure status to affordable housing will provide a big boost towards accomplishing Housing for All Mission. There shall be considerable increase in volume of construction activities across the country. Other reliefs in terms of project construction period, tax reliefs, definition of affordable housing size will also go a long way,” he said in an email.