Budget expectations: Modi 3.0 may propose income tax rate cut, incentives for PSUs

Analysts also suggest that the June quarter corporate earnings season (Q1-FY25) will likely lead to stock-specific movements and influence overall market sentiment, Business Standard reported citing various brokerages.

However, analysts note that the budget's impact on market performance from a medium-to-long term perspective is decreasing.

According to a note from Morgan Stanley, expectations (as indicated by pre-budget equity market performance) play a crucial role in determining market reactions immediately after the budget, said the report

They observed that the market tends to decline on two out of three occasions in the 30 days following the budget announcement, it added.

“The probability of such a fall rises to 80 per cent if the market has risen in the 30 days preceding the budget. Only twice in 30 years has the market been up both pre and post the budget. This year, India is tracking higher on both an absolute and relative basis and if it were to hold this performance into the budget day, then there is a strong likelihood that it corrects post budget,” wrote analysts at Morgan Stanley, led by Ridham Desai, their head of India research and India equity strategist, in a report co-authored with Sheela Rathi and Nayant Parekh, according to the Business Standard report.

Here is what leading brokerages expect from Nirmala Sitharaman's Modi 3.0 budget scheduled to be announced on July 23.

According to BofA Securities, tax cuts to increase consumption, increased subsidies, especially for rural housing, expansion of the PLI scheme, special assistance to states, and additional healthcare coverage are anticipated. Our assumption is an 11 percent nominal GDP growth rate for FY25, the report said.

The government may raise the income threshold for zero tax from Rs 3 lakh to Rs 5 lakh in the upcoming Budget.

There is also consideration to reduce income tax rates for individuals earning an annual income of Rs 10 lakh. As the government encourages the adoption of the Simplified Tax Regime, changes to section 80C are expected. Additionally, there is increasing demand to expand the HRA exemption to include more non-metro cities.

The Union Budget could introduce an amendment in the tax treatment of income from futures and options (F&O) segments with the objective to discourage retail participation in the derivatives trading.

The Budget will extend beyond mere fiscal numbers and is expected to make a broad statement about the government's long-term economic policy towards 2047, according to Goldman Sachs, the report said.

It will focus on the rural economy, job creation through labour-intensive manufacturing, support for MSMEs, skilling, and high-quality service jobs.

A reduced political mandate will necessitate the expenditure of more political capital to pass structural reforms such as land reform and farm sector reforms.

According to Nomura, a populist Budget is not expected. Instead, a continued focus on capital expenditure and fiscal consolidation is likely. That said, the election outcome is unlikely to have a significant negative impact on the macro-outlook or policy.

Motilal Oswal Securities noted that while tax estimates may remain unchanged, record-high RBI dividends could enable the government to spend an additional Rs 1.1 trillion this year while reducing the fiscal deficit target to 5 percent of GDP in FY25.