With Budget 2018 over, markets will now consolidate and remain range-bound

This was the last full budget ahead of the general elections scheduled for 2019. We all expected this to be an ‘election budget’. 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 proposals are mostly in line with expectations. The good thing about these proposals is that once implemented, they can lead to job creation and a pick-up in the economy. The other key positive is the focus on infrastructure where the outlay has been increased by 20 per cent. 

As regards the fiscal deficit, we missed the target for this year as well. I think the government is likely to achieve the set target. The goods and services tax (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. 

That apart, the divestment target has been set at an ambitious Rs 80,000 crore (Rs 800 billion). It is lower that what was targeted in the previous year when the markets were doing extremely well. So, there can be a slippage on this front. That said, in an election year, some slippages are expected.

Most budgets now have been a non-event for the markets. We have been focussing on rural and infrastructure and Budget 2018 has just reinforced focus on both these themes. We were expecting the budget to reintroduce long-term capital gains tax (LTCG) and it has delivered on this front. Beyond a point, investors will get used to paying 10% as LTCG. Logically, the finance minister should have made Securities Transaction tax (STT) as a cost. The good thing, however, the budget has done is to introduce grandfathering of LTCG. By doing this, the FM has prevented an immediate selling pressure.

A worry for me, however, is that a number of trades now happen outside India, say on the Singapore Nifty (SGX Nifty). 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.

With the Budget over, the markets will now look to consolidate and remain range-bound. There will be volatility and investors will need to come to terms with this fact. Overall returns in the calendar year 2018 (CY18) will be much lower than in CY17. That said, we expect markets to remain volatile with intermittent correction. Investors should consolidate their portfolio and be ready for the next leg of the up move.

Jyotivardhan Jaipuria is founder and managing director at Veda Investment Managers. Views are his own.

(As told to Puneet Wadhwa)