Introduction

When observing how stock markets have behaved on budget days, one thing stands out: the outcomes are often quite volatile. The market tends to react to the signals conveyed by the budget live. Is it a conservative or aggressive budget? Is it reformist or status quo? Does it lean towards being pro-market, anti-market, or neutral? Does it favor equity investors? What does the Union Budget of India hold for capital markets and mutual funds? These are the recurring questions that surface, much like they did ahead of the interim budget update in February 2024.

Generally, markets look for budgets that emphasize reforms and growth while also hoping for tax reductions.

However, it’s clear that achieving all these goals simultaneously isn’t feasible, as they often conflict. For instance, a significant reduction in taxes cannot coexist with a substantial increase in government capital expenditure. The question remains where will the funding come from?

Over time, Indian stock markets have adopted a more pragmatic approach to interpreting both interim and Union Budgets. Here’s a closer look at how the budget shapes market movements.

Key Highlights of the Union Budget 2024-25

Personal and Corporate Income Taxes

In recent years, the government has adopted an assertive approach toward overhauling the tax system, introducing a new tax regime aimed at reducing tax burdens for individuals and corporations. The 2023 Finance Bill brought significant modifications to this new tax framework, paving the way for enhanced taxpayer benefits. 

A reduction in direct taxes not only strengthens household budgets but also encourages increased spending and savings, which ultimately benefits the Indian stock market.

Corporate taxes, too, have undergone transformative changes. The landmark reduction in corporate tax rates in 2019 conditional on companies relinquishing exemptions—was a game-changer. Many companies transitioned to the new system, reaping substantial tax savings. This reform of India’s Budget proved to be value-accretive for businesses, boosting profitability and enhancing their performance in the stock markets.

Capital Gains Tax, Dividend Tax, and STT Charges

Capital gains taxation has long been a contentious topic, with recurring demands for more favorable tax treatment. Presently, long-term capital gains (LTCG) beyond three years are not tax-free, and dividends are taxed as regular income, which many argue results in double taxation.

This year’s government budget brought some noteworthy updates:

• LTCG and STCG Rates: Long-term gains on all assets are now taxed at 12.5% without indexation, while short-term capital gains (STCG) have increased to 20%.
• Residential Property Purchases: Individuals and HUFs purchasing residential property before 23rd July 2024 can choose between two tax options for LTCG 12.5% without indexation or 20% with indexation.
• Exemption Limits: The exemption limit for capital gains on financial assets has been raised to ₹1.25 lakhs annually.
• Securities Transaction Tax (STT): The STT on futures and options (F&O) has increased to 0.02% and 0.10%, respectively, from the earlier rates of 0.0125% and 0.0625%.

While some of these changes may increase the tax burden for certain investors, the revenue generated through STT, now nearing $4 billion, remains a critical source of income for the government.

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Budget Allocation for Major Industries

The Union Budget 2024-25 also focused heavily on sector-specific allocations aimed at fostering growth and innovation. Key highlights include:

• Infrastructure Development: Increased capital expenditure on highways, railways, and ports to bolster connectivity and logistics.
• Healthcare Initiatives: Enhanced funding for primary healthcare infrastructure and digital health programs.
• Green Energy Transition: Investments in renewable energy projects and incentives for electric vehicle adoption.
• Technology and Startups: Allocations to promote AI, robotics, and startup ecosystems under the Digital India initiative.

These strategic allocations aim to create a balanced economic growth trajectory, positively impacting market sentiment across sectors.

Budget Implications for Mutual Funds and Bonds

Mutual funds, bonds, and commodities often approach both interim and union budgets with a wide array of expectations. For example, the commodities market has been advocating for the removal of the Commodity Transaction Tax (CTT), which they argue is unjust, particularly as the market is still in a growth phase.

The bond market, on the other hand, has seen a significant boost recently due to the inclusion of Indian government bonds in prestigious global indices such as the JP Morgan Bond Index and the Bloomberg Bond Index. This development is anticipated to channel substantial capital inflows into the Indian debt market, further stabilizing it.

Mutual funds, meanwhile, have been pressing for measures that could drive greater equity investments. Specific demands include special treatment for ELSS (Equity-Linked Savings Scheme) funds and equitable tax exemptions for pension funds, aligning them with the National Pension Scheme (NPS). While these changes have yet to materialize, there is hope that they will be considered in upcoming budgets.

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Why Do Fiscal Deficits Worry the Markets?

A recurring question is why the Indian stock market seems so fixated on the fiscal deficit. The reasons are clear and compelling.

A lower fiscal deficit signals prudent government borrowing, which sends a positive message to global investors and credit rating agencies. It reflects fiscal discipline, enhancing investor confidence in the economy.

Moreover, a controlled fiscal deficit ensures that government borrowing remains manageable. This reduces pressure on the bond markets, avoids crowding out private-sector fundraising, and keeps interest rates stable. Lower interest rates, in turn, are favorable for equity valuations, as they support better growth prospects for businesses and higher stock prices.

Impact on Foreign Investments

The Union Budget of India plays a crucial role in shaping foreign investor sentiment toward the Indian economy. Every year, foreign institutional investors (FIIs) and foreign direct investors (FDIs) closely monitor the Indian budget for signals that could influence capital flows into the country. The policies announced during the budget live session significantly impact India’s appeal as an investment destination.

Pro-investment measures like relaxed FDI norms, sector-specific incentives, and tax reforms can attract substantial foreign capital, bolstering economic growth. For instance, infrastructure development and green energy initiatives often draw global interest, as these sectors promise robust returns. Furthermore, steps like including Indian government bonds in global indices—discussed extensively in this financial year in India are anticipated to channel large-scale inflows into debt markets.

On the flip side, policies that increase tax burdens or impose higher compliance requirements on foreign investors may dampen enthusiasm. Thus, maintaining a balanced approach in the Union Budget 2024-25 is vital for ensuring steady foreign investment inflows, which are key drivers of India’s economic resilience and market performance.

Conclusion

The Union Budget 2024-25 holds significant influence over India’s economic trajectory and stock market dynamics. From fiscal deficits to taxation reforms, every decision impacts investors and industries alike. Staying updated with the latest budget news today is essential as the union budget of India sets the tone for the financial year in India, shaping growth and opportunities for all stakeholders.