Budget 2016: These key fundamentals threw Sensex, Nifty in a tizzy

Sensex tanked over 600 points at some point of trade but recovered all its losses to gain as much as 189 points only to slip again in negative terrain to eventually end the day 152 points lower.

By Aprajita Sharma  
Monday, February 29, 2016

A day of high volatility on Dalal Street thanks to Budget 2016!  

Budget announcements triggered wild moves on Sensex and Nifty as Finance Minister Arun Jaitley detailed his budget speech. Sensex tanked over 600 points at some point of trade but recovered all its losses to gain as much as 189 points only to slip again in negative terrain to eventually end the day 152 points lower. The broader Nifty index also settled the day below 7,000-mark.

We have compiled six key figures from Budget document that outlined market movement today:

1) Fiscal Deficit

Walking on a tight rope to balance between growth and fiscal management, FM Jaitley adhered to the fiscal consolidation roadmap by proposing to keep the deficit at 3.5 per cent of gross domestic product (GDP) in 2016-17. He also assured that development agenda will not be compromised and a committee would be set up to review the working of Fiscal Resposibility and Budget Management (FRBM).

The fiscal deficit in fiscal year 2015-16 has been estimated at 3.9 per cent, which will be brought down to 3.5 per cent in FY16-17.

"Foreign investors are likely to derive significant confidence from the fact that the fiscal deficit is likely to be reigned in at 3.5 per cent, and that India's growth is not dependent on short-sighted fiscal over-spending," said Dinesh Thakkar, CMD, Angel Broking.

2) Capital Expenditure

Government hiked Plan expenditure for next fiscal by 15.3 per cent to over Rs 5.5 lakh crore and also increased the revised estimate spending for this fiscal to over Rs 4.77 lakh crore compared to budgeted Rs 4.65 lakh crore.

It has been a practise for some years to cut budgeted Plan expenditure at the revised estimate stage to keep a tab on burgeoning fiscal deficit. In the last Budget, the government had cut Plan spending by Rs 1,07,066 crore at revised stage.

Plan expenditure entails government spending on social welfare schemes and asset creation. However, the government today announced doing away with Plan and Non-Plan classification from 2017-18 as next fiscal will be the terminal year of 12th Five Year Plan (2012-17).

The government also said it will prioritise its expenditure as the outgo due to the 7th Central Pay Commission award and implementation of One Rank One Pension (OROP) for defence forces will lead to additional burden on the exchequer.

3) GAAR implementation

FM Arun Jaitley said the government is committed to implementing the General Anti Avoidance Rules (GAAR) from April 1, 2017.

"I would like to reiterate our commitment to implement General Anti Avoidance Rules (GAAR) from April, 2017," Jaitley said while presenting the Budget for 2016-17 in the Lok Sabha.

Last year, the Finance Minister had deferred applicability of General Anti-Avoidance Act (GAAR) by two years.

The Government had earlier proposed imposing the GAAR from April 1, 2015, for those claiming tax benefit of over Rs 3 crore. The rules are aimed at minimising tax avoidance for investments made by entities based in tax havens.

4) Dividend Distribution Tax

In his budget speech, the finance minister said that apart from the corporate dividend distribution tax (DDT), high networth individuals (HNIs), Hindu undivided families (HUFs), and firms with a dividend income of more than Rs 10 lakh will be charged additional tax at the rate of 10 per cent.

This announcement of an additional dividend tax disappointed market participants, who fear it will result in higher taxation for wealthy individuals and discourage them from investing.

5) Security transaction tax

The government has increased the STT on sale of an option in securities, where option is not exercised from 0.017 per cent to 0.05 per cent.

"This is a move in the right direction. However, the minor increase of STT on option premium from 0.017 per cent to 0.05 per cent is not expected to move the balance away from derivatives in India to the underlying equity market. Therefore, the current structure of the market should remain intact going forward," said Ashish kumar Chauhan, MD & CEO, BSE.

6) Recapitalizing Public Sector Banks

To provide some relief to the public sector banks suffering with the high levels of non-performing assets (NPAs), or bad debts, Jaitley allocated Rs 25,000 crore for their recapitalisation in the budget.

He plans to provide Rs 25,000 crore capital each in the current and next fiscal years, while Rs 20,000 crore would be provided during 2017-18 and 2018-19.

"A disappointment in the Budget was the outlay for Public Sector Bank recapitalization which was only Rs 25,000 crore even as the size of the problem is significantly larger and demands much more to be done as soon as possible," said Mihir Vora, Director and Chief Investment Officer, Max Life Insurance.

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