Mumbai/Hong Kong: Removal of the long-term capital gains tax and measures to boost consumption are high on equity investors’ wish list from India’s federal budget due Feb. 1.
With the economy facing its worst growth, investment and jobs crisis in more than a decade, Finance Minister Nirmala Sitharaman needs to offer support for individuals and businesses. The scope may be limited, however, amid concern over a larger than projected deficit.
“The government cannot afford to tighten the belt too much,” Hartmut Issel, head of APAC Equities at UBS Global Wealth Management, said by email. Still, the administration is in “no mood to hand out very significant packages,” he added.
Here are the key areas where market participants are looking for action, along with potential impact.
- Rolling back long-term capital gains tax, reintroduced after a gap of 14 years on Feb. 1, 2018, will re-energize interest in stocks, bonds, property and commodities. Possible extension of holding duration would encourage long-term investment.
- The levy didn’t yield much in revenue but soured investor sentiment and reduced the incentive for holding shares over longer periods.
- The tax combined with the selloff in risk assets triggered by prospects of a trade war to spur a near 10% slide in the S&P BSE Sensex over February and March that year.
- About three-quarters of the nearly 900 companies in the S&P BSE AllCap Index posted negative returns over 2018 and 2019, which may prompt a re-look at the tax, analysts say.
- “If risk appetite comes back and capital markets do well, then the cycle that feeds into the fundraising and investment side can take place,” said Mahesh Patil, chief investment officer for equities at Aditya Birla Sun Life Mutual Fund in Mumbai.
- Stock investors in India’s $2.2 trillion market contend with multiple taxes. These include the securities transaction tax, capital gains tax, stamp duty and goods and services tax. A streamlined structure will help boost the attractiveness of the market and wider participation would enhance liquidity across securities.
- Measures to improve real estate demand, such as incentives for purchases, would help clear large unsold inventories at builders and ease the bad loan burden on banks.
- Beneficiaries: Godrej Properties, Sobha Ltd, Prestige Estates Project, DLF Ltd.
- “We may see more targeted help for the ailing property sector, possibly via some tax breaks for buyers,” said Hartmut Issel, head of APAC Equities at UBS Global Wealth Management.
- Cuts in personal income taxes, or a differentiated rate structure for higher income groups, may help revive consumption, which makes up about 60% of GDP. Sales of large-ticket items such as homes and cars may especially see a boost.
- Beneficiaries: Voltas Ltd., Crompton Greaves, Havells India, Whirlpool of India, TVS Motor Co., Hero MotoCorp, Bajaj Auto, Bajaj Electricals, Jubilant Foodworks and other consumer companies.
- “Personal income tax cuts will increase consumption, as well as address the rise of inflation, affecting the mass population base of India,” said Brijesh Ved, head of equities at BNP Paribas Asset Management India.
- Measures to stimulate rural demand and boost agriculture business would help further develop these markets for consumer goods, automobiles and financial products.
- Beneficiaries: Hindustan Unilever, Nestle India, ITC, Britannia Industries, Godrej Consumer Products, Mahindra & Mahindra Financial Services and Bajaj Finance.
- “A renewed push toward states to update their land records, and further moves to strengthen announced farm insurance, health and pension schemes are likely,” said Radhika Rao, an economist with DBS Bank Ltd.
- Well-planned disinvestment of quality government assets could help revive investor interest, ease pressure on public finances and attract more capital flows.
- Candidates: Bharat Petroleum Corp Ltd., Container Corp. of India Ltd. among others
- “The government resolve is there and it will unlock some value from the public sector units and set a benchmark,” Aditya Birla Sun’s Patil said.