The prospect of better returns will overshadow the budget’s securities transaction tax hike

Is it possible for India to target faster growth next fiscal year by raising its expenditure and issuing more debt? Yes it is, and that might be exciting for the equity market in the short-term. Constituents of the economy that benefit from today’s largesse may also welcome such an outcome.

However, this excitement would create a liability that our future generations would have to pay for through higher inflation and taxation. It would also make our macroeconomic position more vulnerable to shocks. As it is, we are dealing with immense shifts in the geopolitical environment and global trade conditions.

In this context, the budget has been pragmatic. The government has articulated its focus on bringing down its debt-to-GDP ratio. It recognizes the elephant in the room, which many are happy not to discuss. After all, interest payments are the single largest expenditure item for the government. They account for nearly 40% of the Union government’s revenue and capital proceeds (excluding borrowing). Arguing about whether the budget is capital expenditure-focused or revenue expenditure-focused, when the biggest spending item is interest, is to miss the wood for the trees.

For traders, the cost of trading in futures and options increases due to the budget’s hike in Securities Transaction Tax (STT) rates. Note that the number of traders in futures and options exceeds the number of investors in mutual funds. This is also reflected in the size of the profit pool of the stockbroking industry compared with that of the asset management industry. These are facts. What is also true is that India’s long-term growth ambitions would be better served by channelling more financial savings into long-term investment than trading.

As for the bond market, the increase in the Centre’s gross market borrowing of around 17% is higher than what was anticipated. This could put pressure on long-term bond yields. But beyond the initial shock, investors can take heart from the government’s long-term commitment to fiscal consolidation.

The budget estimates appear sound, with nominal growth pegged at 10% and tax collection from individuals and corporates estimated to grow at about 11%. Capital expenditure, excluding grants, is estimated to grow by about 11%, while defence expenditure growth appears muted at 5%. The budget positions itself as a catalyst for investment in sunrise sectors while also addressing key infrastructure gaps.

A significant policy announcement in this budget is the formation of a high-level committee to evaluate the growth and strategy of the banking sector in keeping with the country’s Viksit Bharat vision. This could set the stage for further amalgamation among state-owned banks, enabling them to achieve critical scale.

As an ease-of-doing- business measure, any Person Resident Outside India (PROI) will now be allowed to invest up to a higher limit of 10% in listed companies, with an aggregate limit of 24% for all PROIs. This opens up our equity market to greater participation by foreign individuals.

A tax holiday has been offered as an incentive for global companies to establish data centres in India that serve overseas customers. This measure is aimed at positioning India as a competitive global hub for digital infrastructure by lowering the initial cost of investment and improving project viability.

For cash-rich companies looking to return capital to shareholders, a rule tweak that will treat such gains as ‘capital gains’ is advantageous. This will particularly benefit minority shareholders.

Broad stability in tax policy is welcome, as it provides much-needed certainty to businesses and investors making long-term decisions. A predictable tax framework encourages sustained investment, supports efficient capital allocation and reinforces confidence in the country’s overall policy environment.

This budget re-emphasizes two pillars that investors should incorporate into their framework and expectations. India is running a marathon in its journey towards Viksit Bharat and preserving macroeconomic stability is a priority. India’s nominal GDP growth rate is now likely to remain around 10%, plus or minus 1%, rather than the 12%-14% range seen in the past. This slower trajectory has implications for revenue growth, profit growth and equity returns.

Investors tend to think about these numbers in nominal terms. However, what ultimately matters are real returns. The emerging reset in nominal growth may not significantly lower potential real returns, and this would apply to returns both from equity and bond markets.

For investors focused on achieving their long-term financial goals, nothing changes on account of this budget. India’s unique combination of macroeconomic stability and sustainable growth will enable them to achieve their goals.

These are the author’s personal views.

The author is managing director and CEO, UTI AMC.