A lot is expected from the finance minister Arun Jaitley as he rises to present his first full year budget. In November 2014, the finance minister had said that a “whole set of second-generation reforms” will be unveiled in the upcoming budget. The country needs “a larger opening out in more sectors,” it requires stability of policy and tax regime besides a “reasonable” cost of capital, he said. Statements like these have raised expectations from the government.
Broking firm Credit Suisse in its pre-budget report points out that fiscal year 2015-16 could mark the beginning of a series of reforms on the government expenditure front that have been long over-due. According to Ridham Desai, India Strategist at Morgan Stanley, “The upcoming Budget could be the most important one for the stock market after the early 1990s, when India launched economic liberalization.”
The key elements that analysts and economists are looking at is the path taken by the government towards fiscal consolidation and how effectively the government manages to boost capital expenditure given the low tax buoyancy.Read our full coverage on Union Budget
For markets however, which generally get excited by even small giveaways, there are specific measures that will decide the trend of the market.
Following are the key announcements that the market would like to hear from the finance minister to take them to a new high.
1) Higher tax exemption limits: If there is one thing that everyone hates to do, it is pay taxes. Raising tax exemption limits leaves more money in the hands of the people, especially the middle class. This in turn either increases saving or increases consumption and demand growth, both of which are beneficial for the economy.
2) Lower fiscal deficit target: Finance minister might manage to meet the fiscal deficit target of 4.1 per cent that he had set upon himself, especially on the expected fund raising from PSU share divestments and spectrum sales. Market would be keenly listening to the next target he sets. Morgan Stanley in its pre-budget report have written that they believe that the government will maintain the fiscal deficit reduction roadmap as per the medium-term fiscal policy and target to reduce the fiscal deficit to 3.6% of GDP in FY 16 from an expected 4.1% of GDP in FY 15.
3) Reduction in corporate tax: Corporate tax rate at 30 per cent have remained unchanged for the last seven years. In fact, surcharge and cess have been mounted on this basic tax. In order to promote ‘Make in India’ and prevent migration of manufacturing units from India, long term simple tax structure is the need of the hour. Major announcements in tax reforms is expected from the finance minister in this budget.
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4) Complete clarity on GAAR: When the finance minister and prime minister met FIIs, the issue that was discussed the most was General Anti Avoidance Rule (GAAR). FIIs wanted the issue to be deferred further from the current dateline of April 2015. A final clarity on GAAR would help FII investors, both in debt and equity to take a longer term call for investing in India.
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5) Market related reforms: Nothing excites the market more in the short term than reforms meant for the market. A long standing demand for removal of STT (Statutory transaction tax) would revive small investors and arbitrager participation in the market. Among the other measures that can further excite the markets are scrapping dividend distribution tax, clarity on status of fund managers of Foreign Portfolio Investors (FPI).
Though the market is expecting increased volatility on budget day, Ridham Desai of Morgan Stanley says that Union Budget’s influence on short term market performance is declining.
In any case there is one thing that the market would not like and that is a new tax, especially one under the garb of ‘Swachh Bharat Tax’. Whether the tax will be effective in cleaning the country can only be witnessed over a longer term but in the short term, it has the potential to wipe away some gains.