Will Falling Sensex Throw Budget 2018 Estimates Off Balance?

The markets are in a global slump. What does this mean for the projections made in the Union Budget 2018?

Sanjay Pugalia.

(Photo: The Quint)

The peculiar thing about data that is released by the government is that it tends to conceal more than it reveals. The Narendra Modi-led government’s last full Budget ahead of the 2019 Lok Sabha elections projects aggressive revenues – as governments are wont to do. However, the current mood of the stock market suggests that the government may not be able to meet these estimates.

Take the newly introduced tax on Long Term Capital Gains, for instance. The government predicts that the LTCG tax, that was introduced after much debate, will bring in earnings of Rs 20,000 crore in 2018-19.

Market experts say that the timing of the rollout of the tax is wrong, considering the global stock market meltdown.

Math of LTCG Earnings Unclear

It was announced that the tax would apply to share prices after 31 January and that no tax would be applicable on income from shares up to Rs 1 lakh. However, in a scenario where both Sensex and Nifty remain below the current levels – owing to the market slump – the government may not be able to meet the estimated revenue. An inactive market means low trade volume, which subsequently means a fall in the revenue collected from Security Transaction Tax. In order to plug the fiscal deficit, the government may transfer funds from one PSU to another so as to claim that disinvestment has been completed.

The issue at the moment is that the government changes its stand about the budget data, if needed. The government failed to sustain the fiscal deficit figures. The real fear is that the government did not meet its income targets, and if the fiscal deficit increases, it will affect the economy – inflation and interest rates will increase.