Union Budget 2011-12: What it means for your investments?
Union Budget 2011-12: What it means for your investments
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The Union Budget for 2011-12 has brought cheers to equity and bond markets alike, with stocks rising by more than 3% a day after the budget and 10 year g-sec yields easing to sub 8% levels post the budget. Though the budget did not have much relief for the beleaguered common man who is suffering from high inflation, it was nevertheless taken as a positive by financial markets. A peculiar and probably heartening feature of this budget has been the lack of any short term populist measures for the masses. Though it sought to address the ills of inflation, the focus was more on improving the supply side in the medium to long term rather than providing short term relief measures to the common man such as lower taxes.
The budget was presented in the backdrop of high inflation and high interest rates, signs of slowdown in growth, corruption, high fiscal and current account deficits and a pause in the reforms process. Though no decisive steps were announced on issues such as corruption and reforms, there were proposals to control inflation by ensuring a robust supply chain for food items, support growth by way of higher investments in infrastructure and managing fiscal deficit by announcing revenue neutral tax proposals and by not proposing significant populist doles.
Fiscal Deficit: There was a real surprise on this front. Fiscal deficit for 2010-11 was revised at 5.1% of GDP (against a target of 5.5%) and the one for 2011-12 was projected at 4.6% against a target of 4.8%. With the government borrowing figure for 2011-12 set at Rs. 3.43 lakh crores, less than that in the current fiscal, both the equity and debt markets were taken by surprise and rallied. Though the government seems to be a tad too optimistic on revenue targets for 2010-11 and hence 2011-12, the figures projected shall nonetheless provide relief to bond markets as interest rates are likely to remain subdued. Apart from that, the expenditure targets also seem to be too low with a growth of a mere 3.4% being projected for 2011-12. The projected oil subsidy bill of about Rs. 23000 crore also seems a bit too low given the current volatility in oil prices and deteriorating political situation in the Middle East. Global oil prices thus remain a crucial factor in deciding whether the projected fiscal deficit is met or not. Whereas the revenue targets are a bit optimistic and run the risk of not being met, the expenditure side threatens to be higher than expected for 2011-12, thereby raising the risk of the actual fiscal deficit exceeding the estimate by some margin.
Inflation: Instead of providing temporary relief to tax payers, the finance minister chose to address the menace of high inflation by announcing measures to improve the production and supply of farm / food products. Capital investments in Fertiliser and Cold Storage were granted infrastructure status, businesses engaged in fertiliser production were made eligible for investment linked deduction, process was formulated to create additional storage capacity for farm produce, mainly food items, target for bank credit to agriculture sector was increased by a whopping 26.7% to Rs. 475000 crores, additional 1% interest subvention was provided to farmers who repay short term crop loans as per schedule, the interest subvention scheme for crop loans was extended by a year, fifteen mega food parks were announced to be set up in 2011-12, Rs. 300Cr was provided to attain self-sufficiency in production of pulses, Rs. 300Cr to bring 60000 hectares of area under oil palm plantation, etc. The task of managing core inflation was largely left to the Central Bank though the Budget too did its bit by not hiking basic rates under customs and excise duty. It is heartening to see the government taking long term decisive steps to address supply side issues in inflation.
Growth: The Finance Minister chose to address future concerns on growth by focusing on infrastructure. A 23% increase in funds allocated for infrastructure to Rs. 214000cr. (48.5% of total plan expenditure), creation of income tax exempt notified Infrastructure Debt Funds with a lower withholding tax rate of 5% to attract foreign investments in infrastructure, nod to infrastructure finance companies to raise Rs. 30000Cr in 2011-12 by way of tax-free infrastructure bonds, increasing the FII limit for investment in bonds issued by infrastructure companies with residual maturity of 5 years or more to $25 billion from $5 billion, allowing FIIs to invest in unlisted bonds of infrastructure companies with minimum lock-in period of three years and extending the Income tax exemption u/s. 80CCF for Infrastructure bonds, are steps in the right direction. With this, the finance minister has sought to ensure ample funds for the infrastructure sector at reasonable cost. The only missing link is now execution and that too should begin soon as projects are awarded by concerned ministries and orders start flowing in.
Corruption: Though it is outside the scope of the budget to address issues related to corruption, the finance minister showed an intent to tackle the same by announcing the formation of a GoM to consider measures for tackling corruption. The Group has been tasked with addressing issues relating to State funding of elections, speedier processing of corruption cases of public servants, transparency in public procurement and contracts, discretionary powers of Central ministers and competitive system for exploiting natural resources.
Reforms: The budget remained neutral on the reforms side with no concrete steps being announced for major reforms expected in insurance, multi-brand retail and banking. The Finance Minister simply reiterated the government's resolve on getting the Direct Tax Code implemented w.e.f. April 01, 2012 and introduce the Companies Bill as well as the GST related Constitution Amendment Bill in the current session in the Lok Sabha.
Carrots and Sticks for Mutual Funds - A major development for the mutual fund industry was to allow SEBI registered Mutual Funds accept subscriptions from foreign investors in their equity mutual fund schemes. This should surely go a long way in adding depth to the industry and improve its role in Indian stock markets that otherwise dance to the tunes of the FIIs. There was however a setback for the industry in the form of higher dividend distribution tax (now 30%) on income distributed to non-individual and non-HUF investors by money market funds as well as other forms of debt oriented funds. The dividend distribution tax rate for individuals and HUFs however remains at 25% and 12.5% for liquid funds and debt funds other than liquid funds respectively. The purpose of this step is to eliminate the tax-arbitrage between money market and debt funds and bank deposits, thereby encouraging increased flow of funds to the banking sector. However, in doing this, the finance minister seems to have ignored the contribution of mutual fund industry in deepening the money and debt markets in India. This step is likely to be detrimental to investors as well as mutual funds alike and should be rolled back.
Personal Taxation - On the personal taxation front, the budget offered very few incentives to the individual tax payer. The basic exemption limit for individuals was hiked by Rs. 20,000 to Rs. 180000 which should lead to a maximum tax saving of Rs .2000 p.a. The limit for senior citizens was hiked by an even lower amount of Rs. 10000 to Rs. 250000 whereas that for women remained unchanged. However, by bringing down the qualifying age for senior citizens from 65 years to 60 years the budget has given them a tax relief of as much as Rs. 9000 per annum for those aged between 60-65 years. A new category was introduced for 'very senior citizens' (age above 80 years) providing a basic exemption limit of Rs. 500000, resulting in a maximum tax saving of Rs. 26000 for them. With no other benefits in personal taxation there was no hike in limits u/s. 80C, 80CCF, 80D (mediclaim premium), 24(b) (interest on home loans) - the budget was a dampener for individual tax payers. Tax deduction u/s. 80CCF on investment in infrastructure bonds to the tune of Rs. 20000 was extended to 2011-12.
Corporate India was more fortunate on this front with surcharge on tax being reduced from 7.5% to 5%. A marginal hike in Minimum Alternate Tax (MAT), from 18% to 18.5%, is unlikely to impact them in a significant manner. However, the proposal to bring developers of Special Economic Zones (SEZs) as well as units operating in SEZs, under the ambit of MAT is likely to discourage investments in SEZs.
On the Service Tax front, while the standard rate was kept unchanged at 10%, some new services were brought under the Service Tax net viz. Specified hotel accommodation, Air-conditioned restaurants, services provided by specified hospitals and diagnostic centres (at a lower rate of 5%; government hospitals to be kept out of this levy), air travel, traditional life insurance policies (except pure term loans) and legal services (except those provided by an individual to another individual).
Budget 2011-12: Impact on Investments
Impact on Stock Markets
Going by the initial reaction of the stock markets, they seem to have taken it on a positive note. The lower fiscal deficit and government borrowing plan for 2011-12, thrust on infrastructure investments and steps to control high food inflation by strengthening food production and supply, combined with lack of any negative news, led to a strong rally in markets that were already trading in the oversold zone.
Businesses related to infrastructure, Agriculture and low cost / affordable Housing are likely to be the key beneficiaries of the budget proposals. The budget has proposed investment linked deduction to businesses engaged in affordable housing and has extended the existing scheme of interest subvention of 1% on housing loans to housing loans upto Rs. 15 lakh where the cost of the house does not exceed Rs. 25 lakh. Apart from this, the existing housing loan limit under priority sector lending has been enhanced from Rs. 20 lakh to Rs. 25 lakh. A mortgage risk guarantee fund to guarantee housing loans taken by economically weaker sections and LIG households and the proposal to set up a Central Electronic Registry under the SARFAESI Act (to be operational by March 31, 2011) are also likely to be a positive for the housing sector.
Given the current valuation levels and the prospective long term growth potential of the economy as well as corporate earnings, investors can go neutral on equities from an underweight position.It is very hard to find what else could play a spoilsport for equities in the medium term, except of course for higher oil prices.
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