Prabhudas Lilladher
The key expectations from the budget this year are all about economic revival. The FM & PM in their pre budget discourses have clearly pointed out that they will be targeting a 4.8 percent Fiscal Deficit next year. The key is how this is achieved. The government has already taken steps to curtail expenditure as well as subsidies. The focus now has to be on economic revival where an improvement in the economy will boost government tax collections, increase employment & prosperity. However this should not be done by increasing taxes in any major manner as in a slowing economy increasing taxes is self destructive. A tight fiscal & monetary policy together is suicidal for the economy and should be avoided. Three moves that the FM can take are:
The biggest reason for a continuous liquidity deficit in the domestic markets, other than of course the tight monetary policy of the RBI has been the rising CAD which is taking domestic liquidity out. Although the government has raised duties on Gold it is improbable that demand will fall drastically just because of this move. The focus should be instead on promoting investment both in Equity & Long term debt. An upfront tax incentive of 10% for saving upto Rs 2,00,000 in Equity Mutual Funds with a 3 year lock in will be attractive for investors. However this should be separate from the tax breaks that come with investing into Tax Saving Mutual Funds under a separate category. A similar tax incentive can be provided for investment into Bank Fixed Deposits with at least a 7 year maturity.
Short term capital gains tax should be abolished on profits from equity mutual funds as well as direct equity. This will have a dual impact - increased participation from domestic investors who have been continuously pulling out money from equity and remove of incentive for Foreign Investors to invest money into India through tax havens. More and more direct and transparent money will come into the country.
It is now time that domestic interest rates come down. My suggestion on this front would be for the government to go in for a long term sovereign bond issue, preferably with a 20 or 30 year maturity. Given extremely low rates available globally and the reduced risk aversion, my estimate is that India can raise 30 year USD money at approximately 4.5 percent.
If the promise to boost economic growth is delivered, then the focus should shift to sectors that benefit from economic growth like Financials, Capital Goods and Infrastructure stock etc. However, a disappointment could see investors continuing with an overweight position in defensives.
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