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Seven things that market expects from Budget in July
May, 29th 2014

The event of the new government formation is over and the market, which had already run up in anticipation, is taking a breather. The next big trigger for the market will be the Union Budget, to be presented in Parliament in the month of July.

Investors are now looking for signals like what the Budget entails, what the government does on the projects and the policies front.

"The first budget will be the big policy tool that will be the indicator of what the government intends to do and there will be some short term and long-term item measures," said Pradip P Shah, Chairman, IndAsia Fund Advisors, in an in interview with ET Now.

The NDA government, as it promised in its manifesto, is expected to focus on growth to give a boost to the weak economy even as the fiscal consolidation remains top priority.

Following are the factors that the market is hoping from the new government:

Forward Contracts/CTT: Traders from commodity derivatives market are expecting the government to announce steps to restructure the Forward Contracts Regulation Act (FCRA). They are also expecting the government to do away with the commodities transaction tax (CTT) which was levied last year on metals, bullion and a few processed agri commodities.

Rajiv Gandhi Equity Savings Scheme: Marketmen are hoping the new government to announce measures like tax breaks on stock market investments to attract new investors. The introduction of the Rajiv Gandhi Equity Savings Scheme by the previous government did little to bring in first-time investors in a tough economic environment.

Fiscal consolidation: The market is expecting the new government to present a fiscally-responsible Budget. The UPA government had laid a financial consolidation road map to lower the fiscal deficit to 4.8 per cent of GDP in 2013-14, 4.2 per cent in 2014-15 and 3.6 per cent in 2015-16.

"We expect the new government to remain on the fiscal consolidation path, though a marginal upward revision of the FY15 fiscal deficit target cannot be ruled out. The outgoing government targeted a FY15 deficit of 4.1% of GDP. We do not expect a significant upward revision given the strong fiscal discipline seen under the previous NDA government and in Gujarat under Modi's leadership," said a Standard Chartered report.

The government will have to focus on clearing stalled projects and announcing new ones to boost growth, but high fiscal deficit will give it less room to go for an over-drive.

Roadmap for GST: Investors are expecting the new government to announce its roadmap for implementation of the Goods & Services Tax (GST).

There has been a demand to shift from complex tax structure to a simpler GST, considered as a game-changer. The GST is expected to broaden tax collection and spark spending, adding as much as 2 percentage points of growth to Asia's third-largest economy.

Credit Suisse predicted that GST would be the first 'high impact' legislation taken up by the new parliament.

However, the government may find it difficult at the moment to pass GST as it also requires support from the state governments.

The BJP manifesto promises to work with the state governments to usher in the GST in an appropriate timeframe. For implementing the same, it plans to put a robust IT network system will in place.

Lower subsidies: The BJP has been vocal of reviving growth by job creations and lowering subsidies. The BJP manifesto said it will seek greater fiscal discipline without compromising on the availability of funds for development.

As major component of subsidies is from the oil & gas sector. The government may look at completely de-regulating diesel prices unlike a hike of 50 paise per litre per month in the UPA government. It may also re-look at a cap on LPG cylinders for home use.

The government may rationalise the spending on social welfare programmes.

"We think the approach may be to temper down spending, especially less productive spending areas like NREGA which will likely be integrated with asset creation programmes," said a UBS report.

Removal of Securities Transaction Tax (STT): Traders in market will be a happy lot if the new government lowers or removes the STT in its next Budget.

STT is levied on the sale and purchase of equities in the capital markets. The previous government had fixed its collection from STT to Rs 5,992 crore in 2014-15.

A majority of the market participants have been demanding removal or lowering of this tax. In its manifesto, the BJP promises to provide a non adversarial and conducive tax environment and rationalize and simplify the tax regime.

In a populist measure to thank its vote bank, the government may lower STT.

Gold duty cut: The previous government had banned gold imports to arrest the widening current account deficit. The situation has changed since then and the huge inflows in the Indian markets and ban on gold imports have helped to bring down CAD considerably.

India's Q1 2014 current account deficit improved to 0.2 per cent of GDP, from 0.9 per cent of GDP in the previous quarter. The improvement was driven by a continued reduction in the trade deficit due to a relatively larger decline in imports compared to exports.

"We expect the current account deficit to rise gradually to 2.6% of GDP in FY15, due to a gradual increase in imports driven by a recovery in domestic demand as well as some relaxation in gold imports by the new government," said a Goldman Sachs report.

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