Ways the budget could impact Indian stock markets

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Indian Equity Markets’ Growth and The Influence of The Union Budget

Indian equity markets have witnessed remarkable growth with the market cap crossing $4.4 trillion, as per our source from December 2023. With more than 13.9 crore demat accounts, mutual fund contributions via SIP standing at ₹16,700 crore monthly, the numbers present an impressive story. However, the potential of Indian equity markets remains untapped to a significant extent, and a forward-thinking, market-friendly budget might be the key to unlocking it.

Union Budget and Equity Markets: What Can Budget 2024-25 Do?

While the 2024-25 budget is an interim one, the lessons of 2019 suggest that even interim budgets can set the tone for serious discussions post-elections. The 2024-25 Union Budget could consider several strategies to address the equity market and promote investment.

Direct Impact of the Union Budget on Capital Markets

One key issue the 2024-25 Budget could address is the double taxation of dividends. As of now, dividends, which are already post-tax appropriations, are taxed at the incremental rate. A lower, concessional rate on dividends, whether from direct equities or mutual funds, can be considered.

Making long-term capital gains on equities held beyond five years tax-exempt can help enhance the appeal of equities for long-term financial planning.

The dinero market in India is primarily sustained on the shoulders of mutual funds and SIPs. Switching between plans or options can be made tax-neutral, allowing investors to choose what works best for them without worrying about capital gains tax.

With the new tax regime from FY24, ELSS (Equity Linked Saving Scheme) has lost its tax-saving allure. By offering special tax breaks on ELSS, the Budget could attract investors and develop the equity culture in India.

How Can The Union Budget Enhance Equity Market Growth?

The 2024-25 Budget should focus on creating an investor-friendly ecosystem for the growth of the equity markets. The budget should send out a resounding message of growth and reform, especially ahead of the 2024 general elections.

Effective management of the fiscal deficit is a key component of strong capital markets. The Union Budget needs to outline a path from 5.9% in FY24 to 4.5% in FY26, presenting a mid-point of 5.3% fiscal deficit. This commitment to fiscal responsibility will appeal to both rating agencies and foreign portfolio investors (FPIs).

Boosting capital expenditure or capex is another way the budget can influence equity markets. Capital markets could significantly benefit from a 10% increase in the capex budget.

Lastly, the budget needs to emphasize disinvestments to raise resources for the government and augment the quality stock supply in the markets.

In conclusion, while the interim budget might limit the Finance Minister’s actions, it can still set the agenda for the full budget and greatly influence the capital market.

Note: Views expressed in this content are personal and are based on the insights of Suresh Shukla, Chief Business Officer, SBI Securities.

Elijah Muhammad