Abolish STT, sops for rural India: What markets expect from interim budget

Interim budget proposals are likely to have a hint of populism given the upcoming general elections, believe analysts, but unlikely to derail the government from its path of fiscal prudence.

The interim budget proposals that will be presented on February 01 in the backdrop of the general elections scheduled in April / May 2024 are likely to have a hint of populism, believe analysts, but are unlikely to derail the government from its path of fiscal prudence.

“We estimate FY25 fiscal deficit target at 5.2 per cent of GDP. Assuming the tax revenue growth at around 12.5 per cent (similar to FY24E, driven by 11 per cent nominal GDP and 15 per cent corporate earnings growth); the total expenditure growth would have to be limited to nearly 7-8 per cent (versus 9 per cent in FY24E),” wrote Mahesh Nandurkar, managing director (MD) at Jefferies, in a co-authored note with Abhinav Sinha and Nishant Poddar.

This low capital expenditure (capex) number, Jefferies said, might disappoint the market; and stocks exposed to the government's capex program may see some correction. Although Nandurkar does not expect an immediate tax hike considering elections, some post-election measures such as higher capital gains tax are possible later during the year.

“Disinvestment may also get ramped up post elections, partly as the government capitalises on the sharp run in PSU stocks in sectors such as railways, defence etc. Any significant boost to rural infra / welfare schemes will be a sentimental positive for cement/rural recovery. Renewed interest subvention scheme for affordable/mid-income housing is likely, which will be a positive for select developers such as Lodha, Sunteck and housing finance companies such as Aavas and Home First,” Nandurkar and Poddar wrote.

Higher-than-budgeted tax and non-tax revenue, said analysts at BofA Securities, is likely to provide for potential shortfall in divestment proceeds, higher than budgeted subsidy bill, modestly higher interest expense and other revenue expenditure.

“We do see some saving on the loans and advances component of capital expenditure. This should result in a lower than budgeted fiscal deficit in absolute terms, while meeting the target 5.9 per cent of GDP,” said Aastha Gudwani, India Economist at BofA Securities.

Farm economy

The upcoming general elections may see some populist schemes in this interim budget, especially measures directed to the farm/agriculture economy. The measures, according to analysts at Motilal Oswal Financial Services (MOFSL) may include the expansion of the PM KISAN Scheme to Rs 9,000 per annum from the current Rs 6,000 per annum, or increased benefits in the form of insurance scheme or higher MGNREGA allocation.

Since the government is in election mode, analysts at Nomura believe there will be tacit targeting of its key constituents, with the interim budget likely to be a political statement. Since most opinion polls expect the current dispensation to be back in power, it is likely that the interim budget will be presented under the assumption of policy continuity after the elections.

“The ruling Bharatiya Janata Party (BJP) has adopted a ‘GYAN’ strategy for the general elections – Gareeb (poor), Yuva (youth), Annadata (farmers) and Nari (women) – indicating the four key constituents that it is looking to target with its economic pitch,” said Sonal Varma, chief economist for India and Asia ex-Japan at Nomura in a recent co-authored note with Aurodeep Nandi.

The markets, on their part, have been expecting removal of securities transaction tax (STT) for a few years now. This tax (charged at 0.1 per cent for delivery based equity trading) is levied on the value of securities transacted through a recognised stock exchange in India.

“Relief in taxation of dividends in the hands of investors will boost sentiment. Capital gains tax structure may be simplified by introducing a uniform holding period across domestic equities and mutual funds. The government may also consider addressing the difference in tax treatment between equity mutual funds and Unit linked Insurance Plan (ULIP). Markets also expect a more comprehensive policy on crypto currency regulation,” wrote analysts at ICRA Analytics in a recent note.