Why Nirmala Sitharaman should not go for any big-bang changes in Budget

For this market to continue without any roadblocks with respect to the budget, there are two very simple expectations; first, this budget should lay out the vision of this government for the next five years, like they did in their earlier stint. This is the first budget of the new government and they should lay out their entire vision in terms of what their likely focus areas would be so that there is clarity among the market participants on what directions this government wants to take going ahead.

The second one is that the government ideally should continue to maintain its focus on asset building, and nation building, which is by way of its investment in , , , , , etc. The policy approach adopted by this government in its earlier stint should continue and there should not be any shift towards any populist measures, which are anticipated, because of the pressure of the coalition. That would disturb the market sentiment and impact the premium that the Indian market enjoys because of the Government’s structure. We should keep in mind that the current bull market is the outcome of the policies pursued by the government and not vice versa.

Now from the capital market perspective what should the government do and not do; the biggest thing the government should do is to revisit the investment limit allowed under section 80C of IT Act, 1960. The investment limit of Rs 1,50,000 allowed in the older regime has not been revised for quite a long period of time. This limit under the section was revised in 2014 by the then Finance Minister Arun Jaitley, and since then it has not been increased despite steeply rising living costs and inflation, particularly during the Covid era. Alternatively, the government could simply look to increase the limit under the new regime to INR 10 Lakhs from the current limit of 7 Lakhs. This could spur consumption and give further impetus to the economy.

In order to maintain the equilibrium in the equity market, the government should not fall to the temptation of tinkering with any of the taxes concerning the capital market. The government should not trifle with respect to capital gains tax structure, STT, or derivatives on any of these matters. I think the market is stable. Any dramatic changes in any one or all of the above could result in instability, with either a positive or negative impact, which is avoidable at this juncture.

The Indian government has seen the power of retail investors. The retail investor has evolved as a wall against the hot money flow of foreign portfolio investors (FPIs) over a period of time. The retail ownership in the market has gone above the FPIs because of which we have become a stable and self-sufficient country from the capital market perspective. In order to reward or give further impetus to the retail investors and encourage them further to prolong their investment in the capital market, one of the following two things can be considered by the government in the interest of India’s investment ecosystem.

There is double taxation on Dividends paid by the company. The company already pays corporate tax on incomes and dividends are distributed from post-tax income. These dividends are again taxed in the hands of investors resulting in double taxation on the same income. Either the government can look at liberalizing provisions related to tax on dividends bringing them in line with partnership firms or alternatively, it can come out with a structure where exemptions are granted in case dividend income is reinvested in equities. This shall be akin to allowing exemption on reinvesting capital gains on the sale of Real Estate under section 54 of the Income Tax, Act, where the capital gains are exempted. If this is also allowed in case of reinvestment of Dividend income, investors will be incentivized. This would further support the theme of investment in the market and the creation of wealth. The government should look at this positively in the forthcoming budget.

In the end, I would reiterate that there’s no need to puncture or disturb the current market equilibrium and something that is already in Autopilot mode.

Technical Outlook

ETMarkets.com

Nifty closed the week higher, extending its six-week winning streak with a new high of 24,592, settling at 24,502, a 0.73% increase from the previous week. The global markets, including the US and European indices supported the domestic sentiment. The India VIX remained stable within the 12-15 zone, reflecting that the index remains stable.

In the daily timeframe, Nifty continued its upward path within a rising channel, marked by higher highs and higher lows. Nifty holds above the 20-day moving average. Despite recent range-bound trading with a positive bias, the support is placed at 24,140, while resistance remains at 24,720 followed by 24,850 levels.