Budget 2020-21: The year 2020 is likely to be an eventful one for India’s financial markets with the market players hoping the government to announce important measures for shoring up investment sentiments.
- By Vijay Bhushan
Union Budget 2020 India: The year 2020 is likely to be an eventful one for India’s financial markets with the market players hoping the government to announce important measures for shoring up investment sentiments and catalysing the growth of the slowing economy. The Union Budget this month will be hence one of the most prominent path benders for the markets in the medium to long term as the policies that are announced then will all be targeted at taking the economy closer to the goal of $5 trillion in the next couple of years.
In this context, the course that our financial markets take in the year 2020 and beyond will be largely determined by the government polices on taxation, for mobilising household savings into the financial markets and for reinvigorating the market for non-equity instruments such as ETFs, Bonds and index funds, among others. Given below are a few crucial policy changes that market players are hoping for in 2020, which could positively sway sentiments on Dalal Street.
Reducing tax burden
Securities Transaction Tax (STT) is currently one of the biggest burdens on equity market players today as it is the largest contributor to per trade transaction cost. Introduced in 2004, STT was in lieu of lower tax on short-term capital gains and ‘zero’ long-term capital gains (LTGC) tax. However, the STT burden was then compensated with a tax rebate under Section 88E, to save those assessed under business income from double taxation.
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Historical data suggests that since the STT tax rebate under section 88E was removed in 2008, market volumes and liquidity have been severely impacted due to an increase in the cost of the transaction, bid-ask spread and impact cost for investors.
A World Bank report suggests that India’s turnover-to-market cap ratio in 2018 stood at 58, as compared to 206 for China, 119 for Japan and 84 for Brazil.
With the economy slowing down significantly in 2019, market players are thus hoping that the government in this year’s Budget will address their long-standing demand of reintroducing the tax rebate under Section 88E, rationalising STT, exempting listed shares from LTCG and withdrawing dividend distribution tax (DDT) to catalyse financial market participation and capital raising activity.
Incentives to retail investors
In 2019, retail investors continued to remain invested in the markets through mutual fund systematic investment plans or SIPs. Channelising retail investors into direct equity investments will be imperative to meet the economy’s need to raise more risk capital for achieving higher growth. Hence, there could be incentives announced for retail investors in the form of tax rebates on direct equity market investments as well as on government’s equity raising plans to meet its disinvestment targets and recapitalisation of public sector banks.
Boosting alternate investment classes: In the last few years, additional investment avenues opened up for investors with the introduction of Indian real estate investment trust (REITS) and Infrastructure investment trust (InVIT). This year, more such regulatory measures are expected to bolster alternate asset classes such as ETFs for equity indexes, gold and bonds. Market players are also looking at hoping policy measures to reinvigorate these markets in the current year.
Measures to deepen Corporate Debt market
The government’s Rs 102 lakh crore infrastructure investment plan over the next five years will require measures for deepening the Indian corporate debt market to raise finance. Hence, this year, more policy announcements for boosting corporate debt is likely along with expectations of a plethora of corporate debenture and bond offerings with a minimum rating of “AA.”
Deeper, robust and liquid financial markets will be essential for revving up India’s GDP with a vision to achieve the $5 trillion mark for the economy by 2024. In 2020, India’s financial markets are thus expecting policy measures and supportive plans which would ensure sustainability and long-term sustained growth.
(The author is President at ANMI. The views expressed are the author’s own)