Need clarity on subsidy spends
Nilesh Shetty , Associate Fund Manager – Equity, Quantum AMC
There are three major decisions I am looking forward to from this upcoming Budget
- A road map on implementation of GST – something long pending, initiated by the previous BJP Government of Mr. Atal Vajpayee, we are expecting the new government to announce something around the implementation of the same.
- It should also be interesting to see what Mr. Jaitley is likely to announce on the status of retrospective taxation cases, what plans the government has to tackle the same.
- Subsidies – whether to continue them? If so, how much to doll out? For how long?
These are some of the questions we hope Mr. Jaitley’s speech answers on the 10th of July, 2014.
Increase FDI in Insurance to 49%
Anoop Pabby, MD & CEO, DHFL Pramerica Life Insurance
The forthcoming budget is an excellent opportunity for the Government to fulfill its promise of high economic growth. There is a clear need to announce significant measures that will fuel growth momentum and confidence in the economy.
At the same time, the government will need to further its efforts to contain the fiscal deficit and control inflation. Expenditures must be made in areas that will have a long term impact on the economy viz. education, infrastructure, and health. Within education, we feel there is a strong need for financial literacy.
At the insurance industry level, we would expect the FDI limit to increase from 26% to 49%. This will bring in much needed capital to the industry and support market development and insurance penetration in the country. We would also like the Finance Minister to provide meaningful tax incentives to generate more demand for insurance policies including a raise in income tax deduction limit, bigger tax deduction threshold under section 80-C/ a separate limit for life insurance premium under section 80-C, removal of service tax on life insurance products, and tax exemption on annuities.
Make India the Gold trading capital of the world
Chirag Mehta, Fund Manager- Commodities, Quantum AMC
- Government policies play a big role in making or breaking the market. The budget is likely the first glance into the policies of the new government and will provide us with cues of the road map for the future. A few other reforms that can be introduced to fulfill the dream of making India the gold-trading capital of the world
- Allow imports and exports of gold to be made freely or with minimal restrictions like a free market.
- In order to find the true price of that commodity or currency we need to get domestic prices on level with international prices. This will bring about an efficient two way transfer of the commodity or currency.
- There is a huge amount of accumulated wealth of gold in India. We need credible and viable policies for mobilization of these savings like the interest rates offered on gold deposit are so low for anyone to even think about parting away with their gold.
- The government should focus on implementation of reforms and look at the bigger picture to develop the gold market as it truly possesses the potential of becoming the gold trading capital of the world.
Treat all equity ‘fund of funds’ as equity funds for tax calculation
Jimmy Patel- CEO, Quantum AMC
Tax exemption under Section 80C of the Income Tax Act should be increased. Within Section 80C, there should be an exclusive limit for mutual fund investments to be qualified for tax savings. Currently, the equity-linked savings schemes have to compete with other forms of savings and eventually lose out.
In addition, retirement management should be made available or open to asset management companies. Today, the CBDT regulation says that you can make an application on a case-to-case basis to the Central Board of Direct Taxes, which will then approve it but unfortunately it has not approved a single scheme post 1997. So, this bureaucratic regulation should be removed.
Normally, retirement money is deemed to be long-term money and once that comes under mutual funds, fund managers will also be in a position to take long-term investment calls and invest in the capital market. So, indirectly it also benefits capital markets and brings financial inclusion as this is actual hard core retail money that the industry will target.
Under the mutual funds structure, infrastructure debt funds are competent. There are separate guidelines for them and their net worth requirement is also less at 100 mln rupees. Unfortunately, we haven’t seen any debt fund being launched under this umbrella, which could be more of a teething issue about getting enough quality papers, not knowing how to value those papers, and being able to rely on them, etc.
When all these grey areas are cleared in terms of the asset that is created or papers that are made available, then there would be a lot of scope for infrastructure funds. If the government also adds on with tax benefits to retail investors, the situation will get much better. The long-term pending requirement is to treat all equity fund of funds as equity funds for tax calculation. Currently, they are treated as debt funds.
Consequently, the appetite of fund of funds will also improve. The question is of understanding that revenue is not going to be a major loss if this exemption is made available as equity funds. Besides that, if you were to go backward and recollect that upto 2002, there was 54EA EB and EC under which any sale proceeds of capital assets, where the full sale proceeds or capital gains from the sales proceeds, if invested into classified equity funds of a mutual fund would get exempted, and the lock-in period was three years or five years depending on the amount of investment. So, the capital gain then probably that should be brought back and indirectly that money can be ploughed back into infrastructure funds.
Bond markets will be bullish if Govt. comes with a roadmap to reduce fiscal deficit
Murthy Nagarajan, Head – Fixed Income, Quantum AMC
With the BJP government getting an absolute majority in the lower house of the parliament, expectation of the BJP implementing its poll manifesto is very strong. The incumbent government has already taken some steps with essential commodities being applicable to potatoes and onions which were removed by the UPA government in 2004. This should help tame inflation expectations in the coming months. The government has also started test runs of mini bullet train from Delhi to Agra.
We expect the government to stick to fiscal consolidation road map and reduce unwanted subsidies in the long run. The fiscal deficit is expected to be around 4.3 % of GDP higher than the 4.1 % targeted in the interim budget. The revenue growth was targeted at 21 %, which seems to be on the higher side and the government may tone it down to 18 % levels. The divestment target would be set at Rs 80000 crores as indicated by government officials.
On the personal income tax front, we expect the income tax exemption limits to be increased from 2 lakhs to 2.5 lakhs. The government is expected to focus on job creation with emphasis given to tourism, agriculture and development of small scale industries. This should lead to incentives given to the SME sector and some relaxation on the labour laws for employment purposes.
The government is also expected to give some tax holidays for dedicated freight corridors in the railway budget to boost transport of goods from railways. The government is expected to boost modernization of railways and increase its operation efficiency. The government is also expected to open the defence sector for the private sector and allow foreign direct investment in defence.
The government is also expected to announce incentives for oil exploration. The highest amount of foreign exchange outflow happens in the defence and oil sector.
We expect the government to chart out a fiscal consolidation road map and reduce fiscal deficit by 0.5 % of GDP in the coming years. The government is also expected to reduce wasteful subsidies and to better target subsidies. The budget will set a roadmap for reduction of subsidies in the coming years.
The bond markets should be bullish if the government comes with a roadmap for reduction of fiscal deficits in the coming years. With the improved in the economy expected in the coming years, the corporate bond market is also expected to be bullish.