Why Bears Gripped Equity Markets Post Budget Announcement
Feb 03, 2020

Author: Divya Grover

Why Bears Gripped Equity Markets Post Budget Announcement
(Image Source: Image by Gerd Altmann from Pixabay)

The equity market witnessed a deja vu moment on February 01, 2020, after Finance Minister Ms Nirmala Sitharaman announced the Union Budget for FY 2020-21. The Sensex nosedived close to 1,000 points on the budget day as the announcement failed to cheer investors.

It may be recalled that post the announcement of the Union Budget for FY 2019-20 on July 05, 2019, the Sensex plunged nearly 400 points. It continued to drop for the next three months till the FM rolled back the decision to withdraw higher surcharge on super rich tax announced in the budget - the major cause of concern for foreign investors.

Let's look at the factors that led to market disappointment on the budget day this year:

Lack of measures to boost growth

One of the major reasons for the market slide was that investors had high hopes from the budget. It was expected to be a make or break budget for the economy reeling with slowdown. The announcement lacked any measures that could provide an immediate boost to economic growth.

LTCG tax stays

It was expected that that long term capital gain tax on equity investment will be abolished or the holding period to be qualified as long-term investment will be extended to more than one year. But there was no such announcement, which left the investors disappointed.

New income tax regime

The common man was expecting income tax relief that could boost consumption growth. Individual taxpayers did receive some benefit on the income tax front but with riders. You can now opt for the new lower tax regime, but to do so, you will have to forego exemptions and deductions available under the Income Tax Act such as Sec 80C for investments, Sec 80D for medical expenses/health insurance premium, etc.

Negative development for insurance companies

Insurance products are one of the most popular tax saving instruments. Taxpayers who see the new tax regime as a more beneficial option may skip investing in insurance products for tax saving purpose. This could have a negative impact on the insurance sector. Further, the government also announced proposed listing of LIC on stock exchanges. Private insurers may see a revaluation of their stocks once LIC is listed.

Lack of sectoral sops

Auto and Realty, the two sectors which have been the most affected as result of the slowdown in economic growth, felt disappointed post-budget. The auto industry was hopeful for a GST reduction and announcement of scrappage policy to boost demand, as well as incentives for electric vehicles and charging infrastructure, all of which were unmet.

Similarly, the Realty sector's demand to address the key issues of inventory pile-up due to weak demand and fund infusion to kick-start stalled projects did not find any place in the budget proposals.

DDT taxable at the hand of recipient

The Budget addressed India Inc.'s long-pending demand to abolish Dividend Distribution Tax (DDT). DDT will now be only taxed in the hand of investors by adding to their total income. This will benefit individual taxpayers -- especially those who are actually liable to pay less tax (due to the tax slab applicable) instead of the current effective DDT rate of 20.36%. However, for individuals in the higher tax slab, tax outgo is likely to increase.

But investors need not panic. As an investor, you must avoid being bothered by short-term market volatility and stick to your investment objective and personalised asset allocation plan.

Once clarity emerges on the various points proposed in the budget, and if global cues are supportive, the markets may bounce back yet again.

The government has proposed various measures in areas such as education, agriculture, infrastructure financing, MSMEs, NBFCs, Internet-of-things, foreign investment, among others, which can prove to be valuable in the long run. The measures taken by the government in the past along with monetary policy actions by the RBI to revive economic growth are likely to prove to be supportive in the coming quarters.

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Feb 04, 2020

I think the FM misread the situation and got it totally wrong this Budget, it was quite obvious that the removal of 10% tax on LTCG will help the market revival, in fact it is also the first point in your anlaysis, don't know why she chose to look the other way. As far as simplifying the IT structure is concerned, now the situation has become more confusing, as the IT will have to be computed according to the old as well as the new regime, to determine which is more beneficial to the tax-payer. The DDT also has been removed only to satisfy the foreign investors, as the previous rate of 15% DDT at source was much lower than the 20% plus tax rate in the investors' hands. All in all a disappointing budget, no wonder the so-called "animal spirits" have not revived !

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