Against the backdrop of global geopolitical
fragmentation, courtesy “Trumpian Tantrums, Finance Minister Nirmala Sitharaman
rose to present her record 9th Budget. The stock market, not always
the best barometer, reacted negatively to some parts of her budget speech,
which were seen as investor friendly but trader unfriendly, on a Sunday, when
FIIs were largely absent from the market. Interest on leveraged trades, which
could earlier be set of up to 20% of dividend income, as per Dinesh Kanabar has
now been withdrawn. Therefore, how furiously the stock & currency markets would
react starting tomorrow is anyone’s guess unless the calming hand of the RBI
intervenes or there is a US trade deal.
Following were the expectations
from the budget, although only some of them were partially met
·
Continue with the path of fiscal
consolidation & keep powder dry to be deployed when necessary. The
Government did not disappoint; announced Fiscal Deficit of 4.4% of GDP for FY
26 & projected a figure of 4.3% for next year.
·
Attract foreign inflows to arrest the fall in
the rupee. India’s Net FDI at 0.1% of GDP for FY 25 is at a multi decadal
low. Suggestion, by some analysts, to extend the benefit of zero taxation, for investments
into infrastructure, currently available for sovereign wealth & pension
funds, to endowments went unheeded. Also passed by was a suggestion to reduce Long
Term Capital Gains tax for stocks to zero for tenure over 3 years (say),
rightly so as Government of India (GOI), appears keen to have similar treatment
across asset classes. STT (Security
Transaction Tax) on F&O for stocks was upped, instead, to curb speculation –
rightly, to protect retail investors against algorithmic High Frequency Traders
– which, however, spooked the markets. 55% of BSE & 70% of NSE revenues, as
per CNBC – is derived from F&O & hence the stock prices of BSE dropped.
While SEBI’s recent paper showed that 9 out of 10 people lose money in F&O,
questions remain though on why STT was increased for stocks alone & not
commodities.
· Rationalization of custom duty slabs from current 8 as was done for GST & an amnesty scheme to unlock 1.5 lakh cr. struck in customs litigations: Custom duties for specific items in strategic sectors like Aviation, Battery & EV & Nuclear power were reduced possibly as GOI, negotiating Free Trade Agreement deals with preferred economic unions like EU, may want to retain the negotiating leverage rather than uniformly drop rates for all countries.
Niti Ayog Chief BVR Subramanyam
averred that while focus was on job creation in budget FY 24 &
manufacturing in FY 25, the focus of the current budget is “services” –
Healthcare, Tourism, Education Sports & Orange economy. Target is to
achieve 10% of global services by 2047.
The broad thrust of the fiscally
credible budget
·
Nominal revenue growth of 10% for FY 26-27 against
8% this year seen as conservative.
·
Higher than expected gross borrowing of INR 17.2
Lakh crores & the fear of “crowding out” effect thereof leading to raise in
bond yields & consequent marked to market losses impacted banking stocks
negatively.
·
It is widely felt that capex as a % of GDP could
largely stabilize at around 3%. But announcement of 7 High Speed Rail corridors
as “growth connectors” & the Defence Secretary’s statement of expecting 20%
growth in Defence budgets over the next 5 years to increase Defence spends to
2.5% of GDP against around 2% now, indicates that we could be up for surprises.
·
India plans to ride the global investment theme
of “AI”over the last one year, especially in countries like US, Korea, Taiwan
etc. by drawing investments into Data centres by offering a tax holiday, till
2047, to foreign companies providing cloud services outside India using Indian
Data centres. Sale to Indian users shall be vide resellers & they will be
taxed appropriately. While investments into data centres will flow, as Indian
states are offering land & power cheap, will foreign nations not be keen on
“data sovereignty” just like India? Will they be comfortable to allow their data
to rest in Indian data centres.
·
As per MeiTY Minister Ashwini Vaishnav there are
15L employees in GCC, 25L in EMS & 55L in ITES. Safe Harbour margin of 15.5%
for a threshold of 2000cr. for IT services, increase in allocation from 22.9K
cr. to 40k cr, for Electronic Component Manufacturing services & Indian
Semiconductor Mission (2.0) are meant not only to fortify supply chains but
also provide greater employment opportunities.
Conclusion
GOI reduced personal income tax
rates & GST rates last year & implementation of the 8th Pay commission
recommendations appears the next arrow in their quiver to pump prime the
economy to drive consumption. No big bang announcements were, therefore, expected
in the budget. Trade deals signed with UK, EU etc will take time to give
results as they are yet to be approved by their respective parliaments. In such
a volatile & uncertain environment, a fiscally prudent budget was the only
option.
