The full year budget presented by the finance minister today left the markets in a bit of a quandary. While the interim budget in February had set a positive tone for the government’s fiscal direction, the full budget seemed to have confused Dalal Street, explaining the initial market dip followed by a partial recovery to close with marginal losses. To be fair, Finance Minister Nirmala Sitharaman kept her expenditure promises from the interim budget, even increasing rural development spending by a robust Rs 88,000 crore, clearly aimed at bolstering rural recovery. She also prudently used the unexpected dividend windfall to lower the fiscal deficit target to 4.9 percent of GDP, a notch below the 5.1 percent interim budget target. In essence, Sitharaman conveyed a message of sound government finances.

Taxing Times for Investors

However, the average Indian investor was left scratching their heads over a series of tax changes. The equity market’s initial over one percent fall after the budget announcement was a clear sign of displeasure. The budget proposed hiking the long-term capital gains tax on financial assets from 10 percent to 12.5 percent. It also brought parity in long term capital gains tax, meaning real estate will now also be taxed at 12.5 percent, up from 20 percent, but without indexation benefits. Short-term capital gains tax also saw an increase to 20 percent from 15 percent, effectively raising trading costs. These changes, especially the capital gains tax and removal of indexation benefits, are being viewed as major disappointments for market participants. As this analysis points out, the tax changes have dampened market sentiment considerably. Further adding to investor woes, the securities transaction tax (STT) on derivatives was increased, a move anticipated after the economic survey’s stern stance on the derivatives segment. This will likely cool down the retail frenzy in derivatives trading, something regulators have been concerned about. The removal of indexation benefits across asset classes, eliminating inflation adjustment for asset prices, is another blow, particularly for real estate investors. It remains to be seen if this will permanently impact real estate demand, but for now, wealthy Indians eyeing luxury property investments may reconsider their plans.

Housing a Bright Spot

While the budget seemed to adopt a somewhat stern approach towards markets, it was noticeably accommodating to states heading into assembly elections. Bihar and Andhra Pradesh received significant infrastructure and redevelopment funds, respectively, keeping coalition partners content. Interestingly, while private consumption did not receive an immediate boost, the continued focus on affordable housing may offer a silver lining. The Finance Minister reiterated the government’s commitment to affordable housing, announcing plans to construct 3 crore additional houses in rural and urban areas. This focus is expected to benefit housing finance companies, as noted in this report, potentially leading to increased loan demand and expansion in the housing finance sector. The budget also maintained its emphasis on job creation, a politically sensitive area. New schemes were announced to incentivise firms to hire more young people, continuing support for small businesses with another credit guarantee scheme aimed at easing credit access for distressed small firms. However, as this report suggests, banks are already lending aggressively to this sector, raising concerns about loan quality.

Looking ahead, the market reaction to the budget suggests a cautious outlook in the short-term, influenced by the revised tax regime. However, the continued government push for affordable housing could stimulate activity in the housing finance sector and related industries, offering a contrasting positive trajectory in specific pockets of the economy. Whether this dichotomy will sustain or if market sentiment will eventually align with the government’s broader fiscal strategy remains to be observed in the coming months.

Image Courtesy: X (Ministry of Finance)