Finance Minister Nirmala Sitharaman will present Budget 2021 on February 1. With equity market hitting all-time highs since November last year, FM's Budget speech is likely to draw attention from stock market investors too. The upcoming earnings season and announcements made by finance minister Nirmala Sitharaman will decide the direction of the market on February 1 and thereafter.
Since India's economic growth will take long to catch up with the current market rally, investors will watch how the FM spells out the recovery plan amid the ongoing coronavirus crisis.
Experts expect that further rally in the market may need the economy to regain its mojo for which the Union Budget will prove to be a ideal platform.
Here's a look at what analysts expect from Sitharaman's third Budget.
Rusmik Oza, Executive Vice President, Head of Fundamental Research at Kotak Securities said, "The forthcoming budget could be promising on the expenditure side as we expect Nominal GDP growth in FY22E to be 14% as compared to (-) 6% in FY21E. We expect additional spending on public infrastructure (roads, railways, housing etc.) in the forthcoming budget. We are factoring in 4% overall expenditure growth in FY22E with most of the expenditure growth driven by capital expenditure growth of 12%.
On the revenue front, we estimate gross tax revenue growth at 16% in FY22E with direct taxes growth of 13% and indirect taxes growth of 19%. The government would need to present a credible FRBM roadmap given that FY21E Gross Fiscal Deficit/GDP would be 7.1% and public debt to GDP at 87%, way higher than the FRBM target of 60% by FY23E. Gross borrowing in FY22E may be marginally lower than FY21E. On the back of a healthy Nominal GDP growth, the Gross Fiscal Deficit to GDP ratio should come down to 5.5% (Vs 7.1% in FY21E). Due to Covid, many people have lost jobs and have seen salary cuts. Some interim relief on taxation front can help the salaried class. Rationalisation of STT can also boost capital markets."
VK Vijayakumar, Chief investment strategist at Geojit said, "The government does not have much fiscal room to provide relief to investors this year. The relief should be directed to MSMEs which are in distress due to the pandemic. However, it is important to keep the capital market buoyant to facilitate IPOs and government's own disinvestment program.
To attract long-term capital, Long Term Capital Gains Tax may be tweaked either by reducing the tax rate to 5% from the present 10% or by removing LTGS if the secutity is held for 2 years. This will not lead to any significant tax loss. The loss will be made good by the rise in Securities Transactions Tax. At the same time, it will be a big boost to long-term investment."
Deepak Jasani, Head of Retail Research at HDFC Securities said, "While Direct and indirect taxes may not offer much scope to innovate or bring path breaking reforms (except those related to capital markets), the main focus could be on boosting manufacturing through schemes like PLI and create jobs. The main aim could be a counter to China in terms of manufacturing capabilities and scale. Defence, Health infrastructure as themes could remain in focus. Spending by Consumer and Capex spending both could be given a boost to kick-start quick recovery. One only hopes that the Budget does not bring new levies (Covid tax) to bridge the shortfall and fund the spend going forward.
PSU sector could be in focus for pushing them to perform in a market like manner. This could be done by giving their managers more freedom, linking their pay to performance and/or stock price movement, making targets based on RoE/RoCE etc. This will help improve their performance and lead to better realisation upon divesting stakes in them. The usual sectors could be in focus i.e. infrastructure, agriculture, employment generation, push for manufacturing, PSU, Realty etc."
Sandeep Nayak, ED & CEO (Retail Broking) at Centrum Broking said, "India's demographic dividend will play out over the next 20 years and a young emerging retail investor class needs to be encouraged to deploy savings into equities at an early age and start the wealth creation journey. Doing away with the tax on dividend pay out to shareholders of listed companies will go a long way in bolstering the equity culture amongst Millennials and create a steady inflow into capital markets in India's journey to be a $5 trillion economy by 2024. Up until FY 2019-20, any dividends received from investments in listed equity shares and mutual fund investments was exempt from tax up to Rs10 lakh.
This meant that the retail investor was spared the tax while ensuring that high net worth investors and promoters of companies paid tax on their dividend income. This tax exemption needs to be reintroduced in Budget 2021.The current economic scenario is marked by softening interest rates weighing against investment into fixed income. Equity shares of companies that have a strong payout history provide a solution to this problem.
Lifting the tax on dividend will not only give further fillip to investment in stocks but also help sustain the current momentum in the market. Investors in stocks do take risk and they should be rewarded not taxed."
AR Ramachandran, Co-founder & Trainer, Tips2trades said, "Even though markets are expecting a once in a 100-year budget due to the pandemic, we believe Budget 2021 will be a conservative one. High unemployment, NPA restructuring of banks, heightened expectations of stellar growth amid rising inflation are the key problems that will impact investors and ensure an average year for stock markets this year."