The Impossible Trinity: FM must bat like Suryakumar Yadav, bowl like Umran Malik & field like Ravindra Jadeja this Budget

Someone said in Impossible it is written I M Possible. The economy and market has expectations that the budget will deliver on the impossible trinity of fiscal prudence, increased allocation for infra investment and not raise tax rates. This task requires batting like Suryakumar Yadav, bowling like Umran Malik and Fielding like Ravindra Jadeja. Bit too much to expect from one player but, Finance Minister Nirmala Sitharaman has delivered that in the past.

The global backdrop for Budget 2023 is fairly bleak. More than a third of the world is likely to go into recession dragging global growth to low single digit. The prognosis for the US economy, which is most important for us, is mixed. The US Fed has been raising interest rates in an attempt to manage high inflation, but so far it has not been successful. They are now facing a difficult situation where raising rates further could lead to a recession, but leaving them low could cause inflation to spiral out of control. One reason for this is that the Fed has kept high liquidity in the system for an extended period of time. The concern now is whether inflation will decrease as expected, as the demand has gone down with the removal of fiscal stimulus, or if it will remain high due to the leftover liquidity in the system. The Fed must walk the tightrope between growth and inflation.

The domestic equity market is currently experiencing a stand off between short-term valuations which are higher than historical average as well as peer average and the long-term growth potential. The upcoming budget is crucial for investors who will seek the trinity of impossible. It's important for the finance minister not to increase capital gains tax rates as there is already a securities transaction tax in place, which generates around Rs 35,000 to Rs 40,000 crore, annually. Additionally, there are long-term and short-term capital gains tax. Instead of changing the rates, it would be more beneficial to have a consistent tenure across all asset classes, for example, keeping the tenure for equities, real estate, and fixed income at the same duration. This could help in reducing the confusion among investors and provide a more stable environment for capital creation.

The better way to raise revenue will be to plug tax loopholes that exist in the market. For example, zero coupon listed debentures are used to convert interest income into capital gains, which results in lower taxes. The listed debenture market is around Rs 1 lakh crore, and it is estimated that a 25-30% tax loophole exists. By considering interest on debentures as interest income and not converting it as capital gains, the government can raise Rs 2,500-3,000 crore annually. The tax treatment on ULIP inter scheme switches should be brought at par with mutual funds.
The budget focus should be on fiscal prudence, which has propelled our markets to trade at a massive premium to peers. Income tax rates are already high, but tax loopholes need to be plugged. Like ethical hacking, FM should invite CAs and lawyers to plug the loopholes. I am sure they will be able to streamline laws and improve tax compliance. There is also a need to raise non-tax revenues through asset monetisation and strategic divestment. One more step that the government should implement is monetizing assets under the Custodian of Enemy Property Act. Enemy properties are valued at over Rs 1 lakh crore and selling it could take care of the current expenditure which will drive growth. Both India and Pakistan had brought in legislation to take over enemy properties following the 1965 war. While Pakistan was able to liquidate the assets in 1971, India is 51 years behind.

The infrastructure built from 1947 – 2014 is the equivalent infrastructure that will be built from 2014 to 2024. The budget should enhance allocation for infrastructure spending and incentivise speedy execution.

The budget should focus on encouraging private investment through tax incentive to accelerate growth. This can include things like tax credits, deductions, exemptions, and other financial incentives to encourage entrepreneurs.

Government should implement exit tax to ensure that individuals or businesses do not evade taxes by transferring their residence or place of registration outside of India. This will ensure that gains made on wealth in India is taxed in India rather than other countries.

India is running a large trade deficit. The budget should encourage coal Mmining, education and tourism industry through PLI scheme.

The government should also consider introducing a scheme like Jan Nivesh Yojna, which would help channelize savings to support Indian entrepreneurs by developing our capital markets. A lot of money today is invested in real estate and gold. India imports gold worth $ 30- 35 billion each year. If the same amount is invested in mutual funds, bank deposits, etc., it will support Indian entrepreneurs in a big way and accelerate our economic growth.

Outlook for 2023
It is expected to be a volatile year with a roller coaster ride. It's important for investors to have an allocation between debt, equity, real estate, and commodity. It's not the time to be leveraged in equity, but to maintain a neutral allocation to equity and use every correction as an opportunity to enter. We suggest a marginal overweight to large cap, and a marginal underweight to small and mid-caps. An equal allocation to equities as an asset class is recommended. The current year is likely to be a buy-on-dips market, where both domestic and global investors will try to encash upon. There could be selling based on short-term valuations and buying on long-term prospects.

(The author is Managing Director, Kotak Mahindra Asset Management Company. The views and opinion expressed in the column are personal and do not necessarily reflect the opinion of the organisation or the Kotak Group.)