Will FM give investors what they want in Budget 2012?

Indian investors have been jittery in the weeks leading up to the Budget. Over the past month, it has shed almost 3 percent although it has rallied mildly over the past few days.

The hope that the Budget could be reformist given the tight fiscal situation of the government was high; some investors even hoped Finance Minister Pranab Mukherjee might bite the bullet and introduce some major reforms and reduce subsidies. But after the Railway Budget fiasco, hopes of any major reforms have been all but quashed.

In the case of capital markets, right on top of their list is the removal of the securities transaction tax (STT), a tax levied on each transaction of shares in the capital market.

While that seems unlikely, its possible that Mukherjee might lower the STT rate. In particular, the transaction tax on deals in the cash market could be lowered to the levels charged on transactions in the futures and options segment.

Given the falling volumes in the cash market and higher F&O transactions, this change will not cause significant loss to the exchequer.

On the other hand, Mukherjee might announce a similar transaction tax on the commodity markets, similar to STT. After all, there is no reason why commodity trades should be excluded from the tax net.

However, to be honest, the STT is the least of the markets’ concerns. The bigger issue is about whether the Budget will contain any proposals for economic reforms and to reduce the fiscal deficit. They will bring more cheer to the markets than an STT rate cut.