The return of the long-term capital gains tax may trigger a correction in the markets but won’t derail the India investment story. The timing won’t be right though.
That’s the view from Saurabh Mukherjea of Ambit Capital and Hiren Ved of Alchemy Capital Management ahead of the Union Budget 2018. There are the two key things that the markets will watch out for. One, whether Finance Minister Arun Jaitley sticks to the fiscal deficit targets (expected at 3.5 percent of the GDP for the ongoing 2017-18 financial year), and if the long-term capital gains tax is reintroduced.
India will be the odd man out among Asian peers if the tax returns, said Mukherjea. Barring a few exceptions, almost everyone believes that bringing it back might give foreign investors the jitters about abrupt policy changes, he said. For him, the added disincentive is that it disturbs the applecart when the government may have to scale up its divestment target. “The only good thing about forewarning discussions is that most marketmen are prepared for a possible re-introduction of the tax.”
The other big elephant in the room is fiscal deficit. Mukherjea said most bond market experts think that a 3.4-3.5 percent fiscal deficit number is reasonable. He expects the target for the next financial year to be 3.2-3.4 percent, which will be par for the course.
Ved’s confident that the finance minister wouldn’t diverge too much from the fiscal prudence path that has been laid out in a year when rating agencies and bond markets are watching it closely.
The government is expected announce a bonanza for the rural consumer amid distress, especially ahead of the general election next year.
Both Mukherjea and Ved doubt that the finance minister would be fiscally imprudent. Ways to enhance the minimum support price and low-cost housing may find a mention. The Bhavantar scheme of Madhya Pradesh, where the government pays the shortfall in the market price to farmers, is very popular and the finance minister may announce something on those lines, said Mukherjea.
They two, however, agreed that it would be a consumption-oriented budget, not capex-oriented. Both from the political and economic perspective, the way to boost the economy is to increase consumption. Higher MSP and a larger allocation to the rural jobs programme (NREGA) could be used as a tool to put money in the hands of the rural Indian. That could spur consumption and the private sector capex cycle may jump in to take advantage of that demand, said Ved. Otherwise, the government doesn’t have the firepower to kickstart the capex cycle, Ved.
To sum it all: they want the government to maintain the fiscal stance, its policy on taxation and thrust on infrastructure, become ambitious about divestment and give incentives to rural India. The markets will love it.
Watch the entire discussion here