The share market tanked right after Finance Minister Nirmala Sitharaman’s Budget speech, and then recovered all losses a few days later. Now, while the stock market is expected to remain volatile for some time, it must not deter investors from loading up good quality shares in their portfolios. Himanshu Kohli, co-founder, Client Associates, explains what the Budget did get right and what it did wrong. He identifies the areas and sectors that would get the much-needed boost from this Budget, even as the income tax proposals withdrawing incentives for equity investments is ‘baffling’. Further, he reveals why personal income tax rate cuts will be harmful even while pushing demand in a short run. Here are the edited excerpts of Himanshu Kohli’s interview with Shaleen Agrawal.
Why did the share market react so severely negatively to the Budget? Was it an indication that this Budget would hurt the economy?
The stock markets have always had an emotional connect with the Union Budgets, despite successive governments having made the budget into a non-event. A close look at the budgets presented by the Modi Government since they come to power will show that all big measures are announced outside the budget. However, this time the severe reaction in the equity markets was probably due to the high build-up of expectations. There was a lot of optimism that we will see a bold budget for economic revival, especially after the Prime Minister’s meeting with industrialists. With no growth momentum and poor sentiment, the equity markets virtually went into a tailspin in response to what was seen as a disappointing budget. On the other hand, the bond market reacted positively to the announcements.
What did the Budget 2020 do well?
We do see some positives in the budget, however; the measures announced for infrastructure, especially tax exemptions for Sovereign Wealth Funds to invest into this sector, will be good for the economy in the long term. The other positives are the emphasis given to agriculture and the intent to lift rural income by 2022; measures to make India a manufacturing hub for electronics; and the boost given to start-ups, which is positive for the private equity space. The Government was able to keep the fiscal math intact while doubling the disinvestment target by announcing the sale of their stake in LIC. These are steps in the right direction, and if executed well, they should help GOI keep our fiscal health under check. The measures announced to deepen the corporate bond market are also positives.
Are any of the Budget proposals counterproductive for equity investments?
Our expectation was that the Government would bring in more measures to deepen the equity culture in the country. The choice given to taxpayers in the lower tax bracket, wherein they can opt for the new tax regime with no deductions, will mean that good savings options like ELSS and life insurance are now dis-incentivised. This will not just have an adverse impact on the equity culture but on the insurance industry as well. Here we are talking about the drying up of high quality money, and not allowing it to come into the markets. This is even more baffling when you consider that data trends clearly point towards Indian households moving away from physical to financial assets over the last few years. We also believe that the new personal tax proposals may boost consumption in the short term, but will eventually be a deterrent to savings, which are important for a conducive investment climate in the country.
Now that the share market has recovered all the Budget losses, do you think it is the right time to buy more in stocks?
Although markets have recovered from the initial hiccup, we are expecting them to remain volatile for some time. This offers a good opportunity for investors to accumulate equities, guided by their respective asset allocations. For example, if one has allocated 50% of the portfolio to equities, and it is now down to 47-48% due to market movement, then one must buy more stocks and take it back up to 50%. Similarly, if in some time, it rises to, let’s say, 55% due to market appreciation, then one must trim it back down to 50%. In short, such volatile phases should be used by investors to rebalance their portfolio as per their stipulated asset allocation. Small investors would be well advised to continue investing into mutual funds via SIPs.