Get past the budget hype

Publication: Business Standard, Mumbai;   Date: July 12, 2009;   

On the global front, oil prices and commodities, including gold, corrected sharply on fears of lower demand and weak global cues. There is no apparent recovery in sight in the short term for most developed markets and this is once again putting pressure on equity markets worldwide.

With the budget out of the way and corrections in most asset classes, the question everyone is asking is, what to do now? The Finance Minister mentioned very clearly in the early part of his speech, “The Government recognises the challenges that this task entails, particularly at a time when the world is still struggling with an unprecedented financial crisis and an economic slowdown that has also affected India. While we are determined to convert our words into deeds, members would appreciate that a single Budget Speech cannot solve all our problems, nor is the Union Budget the only instrument to do so.” The FM’s statement indicates the government is likely to surprise by making progressive announcements in the short to medium term.

So, what does it all mean for citizens and how should you plan your finances now? One of the key things to be kept in mind is that a budget is one of the events that affects equity markets in the short run but is also one that does not have a major impact in the long run. Hence, one must take the budget noise with a pinch of salt and work out a financial plan based on one’s need and financial goals.

The budget and its accompanying volatility should bring some cheer to equity investors in the form of lower prices. Be prepared to invest long-term money if the markets correct from current levels. Don’t wait, saying I will enter later, as investing later never happens. Stagger your investments over a period of time and invest on days when you see good falls.

DEBT
Long-term bond yields have gone up after the budget and so, unless there is clarity on the borrowing pattern, these yields are likely to remain higher for a short period of time. Hence, it is prudent to look at short-term bond funds which can offer decent returns of around 7-8 per cent. At the same time, cash management fund returns will likely go down, as there is excess liquidity chasing short-term assets. Hence, cash management funds will deliver lower returns, as additional money gets deployed at lower rates. An alternative to the interest rate fluctuations is to look at floating rate funds, where the impact of adverse interest rate movements is negligible.

REAL ESTATE

developers have raised easy money through QIPs in the past several weeks. Foreign Institutional Investors who have participated in it in a big way are already in the red by a sizable margin. Easy fund raising and a belief that things have changed because of the new government mandate and the subsequent stock market rally have made developers think raising prices is a smart thing to do (as there is no immediate liquidity pressure on them). However, this is an extremely stupid thing to do, as this can never spur demand and will see downfall of real estate prices later on. If developers do not resort to price cuts of at least 25-30 per cent , real estate prices, which are already in a bubble zone, will once again go to atrocious levels. Stay away from real estate as long as prices do not correct meaningfully.

GOLD
There was some good news in the form of excise duty cuts for jewellery buyers. However, import duty on gold was raised from Rs 100 to Rs 200 per 10 g. In the case of silver, the raise was from Rs. 500 per kg to Rs 1,000. This means that though branded jewelry will not attract excise duty in the domestic market, consumers would still continue to pay high prices. Look at investing in gold primarily through Exchange Traded Funds. Gold prices.at Rs.12,000-12,500 are great rates to buy.

OTHERS
The FM gave some relief to the individual taxpayer by increasing the exemption limit in personal income tax from Rs 150,000 to Rs 160,000 for all categories of individual taxpayers, except women and senior citizens. For women taxpayers, the exemption limit in personal income tax was raised from Rs 180,000 to Rs 190,000 and for senior citizens; the limit was raised from Rs 225,000 to Rs 240,000. The wealth tax ceiling was raised from the current Rs. 15 lakh to Rs.30 lakh and contributions under Section 80DD (several disabilities) raised from Rs. 75,000 to Rs.1,00,000.

One area of prime importance was taxation of ESOPs. Much before FBT was brought in ,if an employee was granted options at Rs. 100 and the current market value was Rs. 300, the employee would have to pay tax on Rs. 200 only after exercising his options and selling his shares in the form of long-term capital gains. Now, with FBT removed, ESOPs can be taxed as perquisites. This means the employee will now have to pay tax on notional gain even before selling his options and making any gain. This is an important grey area and there could be clarifications on these guidelines through the new tax code to be announced shortly.

To summarise , a budget is just one of several events that have an impact on the economy, but depending solely on it to carve out your financial strategy is not a prudent idea. Your financial plan should be based on internal events that are within your control and you should look at such external events to provide some guidance.

The writer Amar Pandit is director, My Financial Advisor

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