Budget 2018: Most markets participants were focussed primarily on long-term capital gains tax. We saw a significant price correction in small and mid-cap stocks in the run-up to the Budget 2018. That is a very narrow way to look at the impact of Budget provisions on the economy and capital markets. Long-term capital gains tax has come back and with a few clever provisions. The grandfathering of gains till January 31, 2018, makes no difference to sale or purchase before or after the Budget 2018. In fact, stocks purchased before the Budget may better be held at least for a year to take advantage of tax exemption. Also, the finance minister has done away with indexation, to simplify as well as increase revenue. The indexation was relevant in high inflation era.
There is merit in the argument that investors making windfall gains on stocks should pay taxes. However, the perennial problem with the Indian tax structure is multiplicity and complexity of taxes. The Securities Transaction Tax (STT) was introduced in lieu of lower capital gains taxes. There is no reason for STT to continue. There is much hue and cry about fiscal slippages. For 2017-18, revised estimate for fiscal deficit target has exceeded the Budget estimate of 3.2% to 3.5% of GDP. In absolute terms, fiscal deficit is higher by Rs 48,318 crore. We should look at this in the light of revenue expenditure increasing by Rs 1,07,371 crore primarily due to higher compensation to states for GST and implementation of Seventh Pay Commission salary hikes. Given growth imperatives, reduction in deficit by further 20bps is not bad at all, even though it is 30bps more than the target set four years ago.
It was expected that there would be a strong focus on rural and agriculture sector. Nominal income of agriculture sector has hardly grown in the last three years. In our zeal for stock markets and global business, we should not forget the farmers. They brought this fact to the notice of our government in Gujarat elections. The proposed hike in MSP was much needed. Interestingly, higher income in the hands of farmers would boost consumption as well as demand for rural housing. There are several other initiatives for rural sectors such as rural market, operation green, and husbandry sector. The Budget envisages a major jump in loans to self-help women groups and also spending on schemes like Ujwala, Saubhagya and Swachh missions for LPG connection, electricity and toilets, respectively.
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The Budget provision of Rs 14.34 lakh crore for rural infrastructure, if spent well, will make some positive difference to our rural folks. For stock markets, there are stronger underlying bullish currents. Global markets are in upswing. Domestic investors, although not happy with long-term capital gains tax, have hardly any alternatives but to continue investing in mutual funds or systematic investment plans (SIPs).