Budget 2024: S Naren on India's fiscal prudence and market implications

"See, in a country like India which is not a rich country, you have to continuously find avenues to tax and you have to use the tax revenues in the right way and continue the growth momentum and you have to ensure that jobs are created," says S Naren, ED & CIO, ICICI Prudential AMC.

What is your take on budget?
S Naren: See, the government over the last decade has managed macro very-very well. Every year, they have looked and seen which are the areas where they can actually afford to increase taxation and not hurt the sectors. So, I think they have done a brilliant job if you look at it. The market can absorb it. Otherwise, the market reaction today would have been quite different, that is the reason why it is a great budget at this point of time.

See, in a country like India which is not a rich country, you have to continuously find avenues to tax and you have to use the tax revenues in the right way and continue the growth momentum and you have to ensure that jobs are created.


And on that count, it has been a great job done, actually on the macro side. That is why India has G-Sec yields which have not gone up in the last three years whereas you look at government securities yield in most of the developed markets they are going up and their macro is looking bad, so that is the biggest thing.

The challenge to the markets has got nothing to do with the budget. The challenge to the market is that there is very elevated investor sentiment and valuations are not cheap across the board.

But what has that got to do with the budget at this point of time, it has got to do with the fact that sentiment is good and valuations are high and things are good, so that has got nothing to do with the market and that is the challenge we grapple with because we tell people to be cautious and it is very tough to get people to be cautious.

What re-rated the market was when there was a cut in corporate tax and PE multiple started going higher. What has diverted flows back into equities is equity gets a better asset class treatment in terms of taxation and also economy is growing. Now that the tax arbitrage is reducing, could that have an impact on the long-term tax proposition of equity as an asset class?
S Naren: So, if equity market starts growing a bit slowly, if equity market starts to give a bit more moderate returns, it is useful in my opinion. I go back to what happened with Harold Minsky in the US. Basically, you cannot have a market which only goes up and up and up and people forget the word called risk.

So, in our opinion, I think we have to be prepared for a period where equity markets do give some risk and also go through a period where they give moderate returns. So, either they give moderate returns or they show risk. One of the two can happen at some point of time in future and investors have to be prepared for it through asset allocation and that is what we have been telling investors and that is why I do not think it is a wrong thing and that is why I think in a way steps this year that the government has done by reducing capital gains tax on real estate is a very interesting step because if you look at equity market, you have huge volumes of transactions and people sell maybe what they own maybe every year.

Whereas in real estate, because capital gains tax and the frictional cost associated with transactions have been very high, they have not been selling what they own for years.

So, with this kind of reduction in capital gains tax, if transactions start happening faster, maybe we will have a slightly different environment and what happens due to that will be interesting for us to watch from our side, from financial markets, it will be interesting to see what happens when you remove indexation and bring down capital gains tax to very low levels like what it is today.

We are talking about only equity markets. But the hint has come for the fixed income market. Hint has come for the bond market more. Reasonable assumptions. Inflation hopefully coming under control. Good discipline on the fiscal deficit front. And a commitment towards capital expenditure. Do you think now it is time to also look on the other side of the fence? We think in equity markets, bond markets are boring and dull, but this budget has made the bond market interesting.
S Naren: For that, you need a little bit more volatility in equity market, otherwise what has happened is that my colleagues in the fixed income side are fine, but the equity market has been just far more interesting to invest in for investors.

I think investors should certainly invest in debt or in asset allocation, that is what we call it. And I think it is absolutely imperative that they should invest in asset allocation and not in equity at this point of time. But having said that, people have just totally ignored debt at this point of time and I am really worried about that. But one episode of volatility in equity market is what will drive that interest into debt. But the government has managed macro so well that debt is also not volatile and equity also does not correct because India's macro and growth has been good, but at least equity is not cheap at this point of time.

So, hoping that some amount of volatility will bring back interest, but we keep talking asset allocation, asset allocation and asset allocation.