India's annual budget is expected to focus on attracting more investors in the sagging capital market by unveiling pro-market initiatives such as abolition of tax on dividend incomes.
Bruised investors also expect the budget to strengthen the market regulatory system and pave the way for conversion of stock exchanges into corporate entity with a view to motivating household savers to put their money in shares.
Finance Minister Jaswant Singh will present his annual fiscal package for 2003-04 in Parliament on February 28.
"This year's budget is very crucial for the Indian capital market in the wake of fragile sentiment prevailing on bourses and the absence of large-scale investments by small investors," said Neeraj Deewan of Quantum Securities.
"The investors hope that the budget would create a framework for a sustained bull run. If some of the proposals currently being talked about are implemented, it will give the capital market a shot in the arm," Deewan told IANS.
"Government support in the form of tax incentives and creating a roadmap for building a scam-free market will go a long way in boosting the confidence of investors in the capital market."
Analysts say the investors' demand to exempt dividends distributed by corporate houses from income tax in the hands of the recipients is likely to find favour in the forthcoming budget.
The government's decision to impose tax on dividends last year had dampened the market sentiment and evoked strong protests from small investors.
"The removal of dividend tax will provide a big boost to the market and bring back the household investors into the market," said Vijay Bhusan, director of New Delhi-based Bharat Bhusan Equity Traders Private Ltd.
"The move to dismantle dividend tax will also be in line with the government's move to project capital market as an alternate mode of productive investment for the middle-class," said Bhusan.
Prime Minister Atal Bihari Vajpayee said last month that there was a need to attract more investors into the stock market by strengthening the regulatory system and creating awareness about the investment options.
Vajpayee said a high rate of domestic savings channelled into productive investments was important to achieve the eight percent economic growth target over the next few years.
According to government sources, the tax exemption on short-term capital gains of mutual funds is expected to continue in the budget for fiscal 2003-04.
A high-level Indian panel on taxation has also suggested that the government should remove long-term capital gains tax on shares of listed companies and dismantle the dividend tax in the hands of the receipts.
The recommendations of the Vijay Kelkar panel, which was set up around six months ago to prepare a roadmap for initiating sweeping reforms in the complex taxation structure, are likely to be part of the government's annual budget.
Analysts say the budget, which will be presented close on the heels of submission of the findings of a parliamentary committee on stock market scams, will also have measures to build a "safe and secure" market for investors.
An Indian parliamentary panel has indicted stockbroker Ketan Parekh and the finance ministry, among a host of others, for a stock market scam that shook the country's financial system in 2001.
The parliamentary committee was set up in April 2001 after a blizzard of allegations of market manipulations triggered a crash on the bourses soon after the presentation of the annual budget for 2001-02 in February.
The market crash eroded billions of rupees of investor wealth. The scam has also had a cascading effect on a host of state-run and private sector banks and financial institutions across the country.
The committee, in its findings, came down heavily on the capital market watchdog, Securities and Exchange Board of India (SEBI), for failing to detect the wrongdoings in the market.
"I think the government will definitely take forward the task of putting in place regulatory safeguards to ensure the safety of investors' money," said Bhusan.
"Although there are some systemic risk involved in putting money in capital market, many of these risks can be mitigated by creating a robust regulatory framework," he added.
Towards this, the government is expected to amend the Securities Contracts Regulation Act to pave the way for conversion of stock exchanges into corporate entities, said the market analysts.
Indian shares have staged a smart rally in the last couple of sessions on hopes of budget sops.