An election centric Budget landing the heaviest blow to equity investors

Let’s set the record straight. Almost everybody expected Budget 2018 to be a ‘populist’ one, sighting the Lok Sabha elections next year. The analyst community made their predictions very clear with regards to the Budget being ‘something for everyone’, by laying a strong emphasis on the rural economy. But let’s look at the announcements made on 1st Feb 2018 through an objective lens.

The big talking point of this Budget was the announcement of the National Health Protection Scheme, which is expected to insure 100 million financially weak families. While the scheme is revolutionary on the surface, the Finance Minister did not clearly spell out the quantum of funds that the government is proposing to allocate for a scheme of such magnitude and ambition.

That said, it is laudable to note that basic healthcare has become accessible more than ever before to millions of Indians, by virtue of this scheme. Moreover, it will surely better India’s rankings on most social indicators. But the biggest take-away from the government’s healthcare initiatives is the realization that committing to healthcare is way better in terms of pleasing voters, compared to unproductive loan waiver schemes.

Going forward, the execution, and more importantly, the economics behind NHPS will matter the most. Experts believe that sans the government backing its announcement with funds and implementation on the ground level, the scheme is rendered meaningless.

It might end up being just another outlay without the desired results. Moreover, farmers may not end up being benefitted greatly with the proposal to pay a minimum support price that is 50 percent above the cost of production. Firstly, while calculating the cost of production, the government only accounts for operational expenses – input costs and family labour.

This accounting does not include the expenses that farmers incur on rent towards land, or even capital for that matter. Hence, even at 1.5 times the cost of the production, the farmer’s kitty may not see too much of a value add with the MSP. It is also important to note that MSP covers only 35 percent of the agricultural output, without being applicable on milk, fruits and vegetables.

Let us now throw light on the salaried class. Clearly, the salaried class, like every year, expected the government to please them with tax sops. It is fair to say that the Budget was a huge letdown in this regard. The reintroduction of Rs 40,000 standard deduction gets compensated with the removal of transport allowance and medical reimbursement. 

Employment generation was expected to be the top focus of this Budget. The government has tried to do its bit towards job creation by bringing down the corporate tax rate to 25 percent for companies with a turnover of Rs 250 crore or less. Having said that, a lot more could’ve been done to address the pressing issue of angel tax for start-ups.

Over the last 3-4 years, start-ups have been the cornerstone of job creation in the country. By providing relief towards angel tax, the most common hurdle that start-ups face, which is early stage funding, could’ve been addressed to a great extent. 

All said and done, the biggest blow was received by stock market investors, with the proposal to introduce the much deliberated Long Term Capital Gains (LTGC) tax above Rs 1 lax at 10 percent. There has been enough and more talk about the expected introduction of this tax prior to the Budget.

The government seemed weary of disturbing the market sentiment this year, given that it still had to raise funds through the sale of shares in state-owned companies. It is a common opinion that equity investors must not regret paying a small chunk of their profits as tax, especially with the stock market buzzing over the last twelve months.

The argument is compelling, but what seems to have impacted long term investors is the fact that Securities Transaction Tax (STT) stays put, together with the new tax on Long Term Capital Gains. Compare this to Budget 2004 when STT was introduced. It was basically introduced to offset the removal of LTGC.

So if I had to sum up Budget 2018, I would say that agriculture, healthcare and the rural economy stands to benefit the most, while the salaried class and most of all, equity investors, have suffered the biggest blows.