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From reintroducing long-term capital gains tax on sale of shares to focus on rural and agricultural sectors, the Union Budget 2018 touched upon many things. JYOTIVARDHAN JAIPURIA, founder and managing director, Veda Investment Managers though tells Puneet Wadhwa that the market returns in 2018 will be lower than in the previous year. Investors, he adds, should brace for volatility. Edited excerpts:
What is your interpretation of the Budget proposals?
As expected, the general focus of Budget 2018 has been on the rural sector and not much concessions for the middle class or the corporate sectors. The good thing about the proposals is that once implemented, they can lead to job creation and a pick-up in the economy as the rural sector starts to prosper. The other key positive is the focus on infrastructure where the outlay has been increased by 20 per cent.
Is there a cause for concern as regards the fiscal deficit target?
We missed the fiscal deficit target for this year but in the context of the goods and services tax (GST) introduction, it was generally expected. I think the government is likely to achieve the set target for FY19 if it maintains a tight ship. The GST is now stabilising. So to that extent, there should be a pick-up in government’s revenues. The e-way bill has also not been introduced. Once that happens, the GST collections will see more buoyancy.
The worry could be the divestment target. Though it is lower than what has been achieved in the current fiscal year, the markets may not do as well, this year. Secondly, the Indian Oil Corporation (IOC) and Hindustan Petroleum Corporation Limited (HPCL) stake sale helped the target this year. So, there can be a slippage on this front in 2018-19. That said, in an election year, some slippages are expected.
Will the imposition of long-term capital gains tax (LTCG) be a deterrent for investors?
For the last two years, the market has been apprehensive about the reintroduction of LTCG. Beyond a point, investors will get used to paying the tax. Logically, the finance minister (FM) should have made Securities Transaction tax (STT) as a cost. The good thing, however, the budget has done is to introduce grandfathering of LTCG.
A worry for me, however, is that the Singapore exchange (SGX) is now planning to trade the top 50 Indian stock futures. Most foreign institutional investor (FII) holding is in the top 50 shares (by market capitalisation). Somewhere what may happen is that FIIs may choose to trade those shares on the Singapore exchange and pay zero tax. As a result, over time, the trades will shift from domestic bourses to overseas exchanges.
What is the road ahead for the markets?
We think the impact of budgets on the market has been waning over last many years. After the strong returns last year, we think returns this year will be moderate and lower than in CY17. Markets will see a phase of consolidation and correction over the next six months. Investors should brace for more volatility than they have seen last year.
How do you see Indian equities fare in comparison to the global benchmarks?
India will be largely driven by global markets. There are two themes that will mark the world in 2018. First is a synchronized monetary tightening to reverse a process which started in March, 2009. Central banks are going to tighten monetary policy this year (US has already started this and the European Central Bank (ECB) will follow in this year) and interest rates are likely to move up.
We think bond markets will weaken first and this will have a rub-off impact on the equity markets. Second is a synchronized growth pick-up. With valuations being high globally, earnings growth needs to rebound strongly for markets to deliver strong returns.
Has the budget done enough to boost economic growth and corporate earnings?
The budget has taken steps within the limited fiscal constraints to kick start the rural areas and infrastructure growth. Overall, we think both economic growth and earnings will revive this year, led large by normalisation of business from the impact of the demonetisation and GST teething problems.