Investors gave a big thumbs-down to announcements made by finance minister Nirmala Sitharaman in her Budget speech on Saturday. The S&P BSE Sensex was trading in the green—up by about 100 points—minutes before Budget 2020 was unveiled. As the speech progressed, the benchmark index gave up early gains to slip into the red, losing 700 points by the time Sitharaman wrapped up her Budget speech and closed 988 points lower at 39,735.53.

“Market expectations were high on capital market reforms which have not materialised and to that extent, there could be some near-term disappointment. As earnings recover in the course of the next fiscal year, markets will also follow a similar path,” said Jaideep Hansraj, MD & CEO, Kotak Securities.

While the markets did not have expectations of big bang announcements, investors were hopeful of measures that would bring India’s floundering economy back on the growth track. This lack of clarity was a major disappointment, coupled with the absence of measures to fire up the ailing economy's animal spirits, or to significantly improve the ease of doing business in the country.

“The markets have reacted negatively to the Budget, mainly due to some disappointments on account of the non-abolition of LTCG, confusion about the impact of DDT removal and taxing dividends in the hands of recipients. Also, the alternative provided to individuals for a lower rate of tax, provided they do not claim exemptions/deductions, did not seem too attractive,” Dhiraj Relli, MD and CEO, HDFC Securities, said.

The crash in the Sensex wiped off close to ₹2.40 lakh crore of investor wealth with the measures announced in the Budget doing little to reaffirm the confidence of investors about boosting people’s income and purchasing power. The proposal to double farmers' income by 2022 supported stocks of companies like HUL though.

“No significant incentive for infrastructure and real estate is a disappointment. The outlay for rural and agri sectors is less than expectations. The Budget reflects the constraints of the sluggish economy within which the FM has had to operate,” Mihir Vora, director and chief investment officer, Max Life Insurance, said.

There was no clear roadmap to boost consumption or kick-start the investment cycle. The markets were expecting announcements that could have ushered in a meaningfully durable uptick in rural spending and infrastructure. The absence of a tangible stimulus spoiled the market mood. Furthermore, the relaxation in personal income tax did not come without riders, and this failed to impress investors.

“The Budget fell short of expectations as the stimulus package for rural, infrastructure, and transportation was up marginally. Further, even the widely expected personal income tax came with a caveat of having to forego earlier exemptions and deductions. The one big positive from the Budget was the abolition of dividend distribution tax and would now be taxed in the hands of recipients instead of firms,” says Ajit Mishra, VP Research, Religare Broking.

The proposal to abolish the Dividend Distribution Tax got mixed reactions. Investors are apprehensive of the proposal to tax dividends at the marginal rate. “Removal of Dividend Distribution Tax will lead to higher cash flows in the hands of cash-starved India Inc. If individual taxpayers opt for the new tax regime then it will result in higher cash in the hands of the individuals. This, in turn, would lead to increased spending or higher investments, both being good for the country,” Hansraj said.

However, Nirmal Jain, founder and chairman of IIFL points out, “The Dividend Distribution Tax has been abolished and therefore obviously foreign investors will benefit but then it becomes fully taxable in the hands of shareholders which is not the right way of doing it because shareholders are also owners and as owners of the company they pay tax on profits and it gets taxed again. So, this might change the dividend culture of many companies, it will impact the private sector investment which has been very sluggish for the last two to three years at least.”

Naveen Aggarwal, partner, tax, KPMG India, says, “Abolishment of DDT and time-bound dispute resolution scheme for direct taxes will drive certainty, build trust and make a compelling case to attract fresh foreign investments. What is needed now is for the government to ace the implementation.”

The biggest casualty of the day was the bank index that lost over 1,000 points on the BSE Sensex. Bank stocks remained under pressure during the trading session on Saturday, notwithstanding the slew of bank reforms proposed by the finance minister in her Budget announcements.

Most notably, the government said it will divest its balance stake in IDBI Bank to private investors and institutions. Not just this, Sitharaman, spoke of the government’s plan to divest stake in LIC via an initial public offering. “The government’s decision to list LIC is a welcome move. This will result in better governance and greater transparency given the disclosure requirements of listed entities. It will also contribute materially to the efforts of the government to raise funds through divestments,” Sandeep Ghosh, partner and leader-financial services advisory, EY India said.

In a bid to rescue the cash-strapped NBFC sector, Sitharaman, said the eligibility limit for the NBFCs for debt recovery under SARFAESI Act would be reduced to asset size of ₹100 crore or loan size of ₹50 lakh. Bajaj Finance and Bajaj Financial Services were among the top gainers in trade.

Furthermore, Sitharaman stressed the need to strengthen corporate governance to prevent irregularities and failures as seen in the case of PMC Co-operative Bank. To this end, the government is working with the RBI to tweak provisions under the Banking Regulation Act.

In the aftermath of the crisis at Punjab & Maharashtra Co-operative Bank, Sitharaman has also proposed to increase bank deposit insurance to ₹5 lakh from ₹1 lakh in the Budget announcements to assure depositors that their deposits are safe.

“We have infused ₹3.5 crore capital into PSU banks. A few among them will be encouraged to move capital market for fundraising purposes,” Sitharaman said. This step has been proposed to help public banks comply with regulatory capital norms and fund growth.

Some factions in the markets had suspected the finance minister would prioritise fiscal consolidation over growth. “The Union Budget has tried to balance higher expenditure and still maintain a prudent fiscal deficit target of 3.5% for FY21. Nominal GDP growth estimates of 10% for FY21 looks realistic on the back of lower base of FY20. Listing of LIC would help bridge a gap in the fiscal deficit for FY21,” says Hansraj.

To be sure, the Sensex and the Nifty have plunged in the past on Budget day and some market participants have shrugged off the steep fall in the market today as a knee-jerk reaction, but many are cautious.

“We will continue to see the overhang of the Union Budget next week as well. Besides, weak global cues would further add to the participants’ worries. The way benchmark ended, indications are pointing towards further fall, with some intermediate pause,” Mishra said.

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