Budget 2018 decoded: Lack of indexation on LTCG to hurt long-term investors

The thrust of the Budget is being seen as broadly populist but positive. This could mean a great deal of activity in the bond markets if it takes off

The stock market was braced for a populist Budget, which imposed a tax on Long-Term Capital Gains (LTCG) and made large allocations to the rural economy. At the same time, investors were hoping for a cut in corporate tax rates. The actual document was thus, broadly in line with the expectations.

The LTCG tax has been imposed, much as expected. The threshold for taxable profits is low at just above Rs 100,000 but the tax rate itself is moderate at 10 per cent and it comes into effect from yesterday! The lack of indexation will hurt long-term investors and this is out of alignment with other LTCG norms - real estate, jewellery, etc., receives an indexation benefit, which may be considerable for the investor, who has held an asset for say, 5 years or even longer.

The cut in corporate taxes to 25 per cent was also largely discounted prior to the Budget and it is being considered mildly disappointing in scope. Instead of being applicable to the corporate sector, this will only be of benefit to small caps and unlisted businesses. The tax incidence on larger corporates will remain unchanged. It could, however, benefit startups and MSMEs so, it's a positive step even if it doesn't go as far as the market desired.  

Apart from this, the thrust of the Budget is being seen as broadly populist but positive. The enhanced focus on rural infrastructure and on the creation of roads, and railway tracks, etc., should lead to more project-related activity and thus, be positive for infrastructure developers and construction companies. This should also mean better offtake for concrete, cement, steel , etc.  In a more general way, if rural income increases, this should mean better consumption patterns that benefit FMCGs, two-wheelers, tractors, tillers and affordable housing.

 

The proposal that corporate financing patterns should change, with about one-fourth of financing being met from the bond markets, has interesting implications. As the Budget mentions, this will mean easing "investment grade" regulations to allow institutions to pick up BBB rated bonds. This could mean a great deal of activity in the bond markets if it takes off. Unfortunately, it's being combined with a dividend distribution tax on income funds and that could hit the investor community.

The disinvestment target of Rs 80,000 cr could mean anything from cross-holdings being created by PSUs to strategic sales to IPOs and FPOs that put shares on the block. The recapitalisation of banks by issuing bonds backed by the Centre has apparently not been included in the estimate of the fiscal deficit.

A quick look through the sectoral indices indicates that there hasn't been much change in most of the industry-specific ones. There was some selling of PSU banks and energy-related companies also saw some selling pressure. Balancing that, FMCG, Infrastructure and consumption-oriented stocks have done well.  Most of the smart money will need to analyse the details before taking a very committal stance.

Devangshu Datta is an independent market analyst. Views are his own