Fiscal prudence can help bring down the cost of capital
fiscal prudence. The glide path 2026-27 onwards envisages fiscal deficits such that the percentage of government debt to GDP keeps falling.
This is a very big and ambitious statement for a developing economy like India. These targets are being achieved without compromising on the quality of receipts and expenditures.
Building such a track record should bode well for the country as this can help the cost of capital come down.
The budget contains a slight dose of reality for the capital markets with capital gains tax-short-term and long-term-getting raised. Equity markets are running significantly ahead of fundamentals with the market cap-to-GDP ratio touching an all-time high of 150%. Several mid & small-cap stocks are trading at a P/E ratio of 80-100.
Sebi cautioned against the exuberance, especially in the F&O market. Taming such overenthusiasm in time is important for maintaining the macro-stability of the system. To her credit, the finance minister didn't hesitate to initiate these curative actions.
Long-term capital gains tax on property sales also changed to 12.5% without indexation benefits and lower holding period of two years against earlier three years. This would increase capital gains tax on real estate transactions and make it unattractive for investors, while genuine homebuyers will benefit from the orderly price increase.
Increasing comfort on external balances and strong forex reserves might have enabled the government to considerably reduce import duty on gold to 6% from 15%. It might also help
