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Market valuations reinforced

Investment avenues under Sec. 80C expanded

THERE ARE not many overly "stock-market friendly'' measures in the budget. Still the stock indices zoomed on the budget day (although earlier in the day they were sliding for a while). The Sensex closed 88 points higher — particularly noteworthy because stock prices were at historically high levels even before the budget announcement. If that was some kind of a record what happened in the next two days has been simply breathtaking. On Wednesday, the Sensex gained 195 points to close above 10500 and on Thursday it closed at 10626 having crossed 10700 during the day.

Absence of many negatives

Of the many explanations, some are more plausible. Interestingly all of them admit that the Finance Minister has not done anything to spoil the party that has been going on for a while. In other words, the absence of major negatives by itself is a positive. Viewed that way the budget has merely reinforced existing perceptions on market valuations without contributing significantly on its own.

The economy has been doing well. The Economic Survey merely reiterated what has been widely known: that the GDP growth in the current year would be over 8 per cent and that savings and investment ratios in proportion to the GDP have reached impressive levels. Probably the biggest talking point after the budget has been the re-emphasis of the principles of fiscal responsibility. For 2006-07 the revenue deficit and the fiscal deficit are to be contained at 2.6 per cent and 4.1 per cent of the GDP respectively.

The budget has not altered the personal taxation structure. The list of investment avenues that qualify for tax exemption under Sec. 80C of the Income-tax Act has been expanded. A significant addition is investment in bank deposits with tenure of five years and over.

This may lead to some "recycling'' as depositors convert existing three-year deposits into five-year ones but in the aggregate this is a welcome move, as all income tax payers will have an extremely familiar and simple channel to do their tax planning.

The steep increase in securities transaction tax (STT) — an across the board hike of 25 per cent ought to have been a disincentive but the stock markets seem to have been prepared for it. The refinements proposed in the fringe benefit tax (FBT) will be examined by experts in days to come. At this stage, however, the fact that the Finance Minister is willing to tone down its rigours, though not abandon it, is seen as a positive factor. In a similar way the persistence with the bank cash transaction tax has been received with more equanimity than when it was first announced.

A probable explanation could be the Finance Minister's promise to review it once the tax administration machinery becomes capable of monitoring large transactions through the system of PAN numbers and other IT based tools to generate information.

On indirect taxes, there is some disappointment that the Rangarajan Committee's recommendations on petroleum pricing have not been implemented even partially (thereby giving some relief to consumers) in the transportation fuels segment. However, as the excise concession on small cars demonstrates the Finance Minister has done his bit to please sections of the middle class. It is quite likely that many among them will be interested in the share market as well.

Specific to the capital market, the Finance Minister has raised the FII cap for investment in government securities and in the corporate debt market.

Deepening debt market

Domestic mutual funds have been given substantially more leeway to invest in overseas securities. Steps are being taken to create a single unified exchange-traded market for corporate bonds. That will be an important step in plugging the lacuna that has hampered the evolution of a debt market with substantial depth. The stakes are high: infrastructures funding — the amounts involved are very large — depend on the growth of such a market. Besides, should the pensions sector too be opened up, there will be a manifold increase in the demand for long-dated debt securities.

All the above, however, do not explain why and for that matter how long the stock markets will remain at the present high levels. The budget and the numerous expert opinions before and after it do not make us any wiser.

C. R. L. NARASIMHAN

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