We were in a secular, long-term bull market even before the election was announced due to various factors. The pre-election uncertainty is over and people are expressing their expectations about what the government should do in its next budget. In my mind, the government should continue with the policies followed in its previous tenure (2019-2024) and not go for any big bang or radical change but just maintain the status quo.
For this market to continue unhindered in terms of budget, there are two very simple expectations; First, this budget should present this government’s vision for the next five years, as they did in their previous tenures. This is the new government’s first budget and they should lay out their overall vision in terms of what their potential focus areas will be so that there is clarity among market participants about the directions this government wants to take moving forward.
The second is that the government should ideally continue its focus on wealth creation, and nation building, through its investment in defence, infrastructure, road construction, ports, railways, etc. The policy approach adopted by this government should continue in its previous tenure and there should be no shift towards any populist measures expected due to coalition pressure. It will disturb the market sentiment and affect the premium that the Indian market enjoys due to the government framework. We must keep in mind that the current bull market is a result of the policies followed by the government and not the other way around.
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Now what the government should and shouldn’t do from a capital market perspective; The biggest thing the government should do is to reconsider the investment limit allowed under Section 80C of the IT Act, 1960. In the old regime sanctioned Rs. 1,50,000 investment limit has not been revised for a long time. The limit under the clause was revised in 2014 by the then finance minister Arun Jaitley, and has not been increased since then, despite the steep rise in cost of living and inflation, especially during the Covid era. Alternatively, the government may consider raising the limit under the new regime to INR 10 lakh from the current limit of 7 lakh. This can boost consumption and further boost the economy.
To maintain balance in the equity market, the government should not be tempted to tinker with any tax related to the capital market. The government should not tinker with any of these matters in terms of capital gains tax structure, STT or derivatives. I think the market is stable. Any dramatic changes in any one or all of the above can result in instability, either with positive or negative impact, which can be avoided at this time.
The Indian government has seen the power of retail investors. The retail investor has evolved over time as a wall against hot money flows from foreign portfolio investors (FPIs). Retail ownership in the market has surpassed that of FPIs making us a stable and self-sufficient country from a capital market perspective. To reward or further incentivize retail investors and encourage them to further extend their investment in the capital market, one of the following two things can be considered by the government in the interest of India’s investment ecosystem.
Dividends paid by a company are double taxed. The company already pays corporate tax on the income and dividends are distributed from the after-tax income. These dividends are again taxed in the hands of the investors resulting in double taxation of the same income. Either the government can consider liberalizing provisions related to tax on dividends to make them compatible with partnership firms or alternatively, it can come out with a framework where dividend income is exempted if it is reinvested in equity. This would be tantamount to exempting capital gains on sale of real estate under section 54 of the Income Tax Act, where capital gains are exempted. If this is allowed even in case of reinvestment of dividend income, investors will be encouraged. This will further support the theme of investment and wealth creation in the market. The government should look at this positively in the next budget.
In closing, I would reiterate that there is no need to puncture or disturb the current market balance and something that is in autopilot mode.
Technical Outlook
The Nifty ended the week higher with a fresh high of 24,592 to settle at 24,502, extending its six-week winning streak, up 0.73% from the previous week. Global markets including US and European indices supported the domestic sentiment. India VIX remained stable in the 12-15 zone, indicating that the index is stable.
In the daily timeframe, the Nifty continued its upward trajectory in a rising channel, marked by higher highs and higher lows. Nifty is above 20-day moving average. Despite recent range-bound trading with positive bias, support is placed at 24,140, while resistance remains at 24,720 and 24,850 levels.
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