While the salaried class got a tax bonanza that will boost consumption, companies will seek to pass on the increase in excise duty or live with lower margins.
The extremely clever Budget unveiled by the FM confirms that the economy has its own momentum in spite of the government. Yes, of course, the stimulus in the form of excise cuts last year, did add a few more rupees into the pockets of the businessman. The NREGA outlay has been enhanced, to ensure rising consumerism. The Budget has been on expected lines and the FM has taken advantage of the fact that most people’s eyes were on the fiscal deficit number.
By curtailing some spending and partially rolling back the excise stimuli in the backdrop of good industrial growth, his task became easy. In fact, the buoyancy in industry has enabled the FM to surprise the small universe of taxpaying Indians to have more money in their pockets. As usual, there is a huge increase in outlays on education and healthcare (from a small base, so it seems large) which one hopes will reach the target audience.
Fiscal deficit (whilst being high) at 5.5% of GDP (due to a higher base than last year, remember) is not very low, but the markets seem to have taken to it kindly.
Non-plan expenditure, thankfully, is only up 6%. The Plan outlay has increased 13%. Of course, we never get to see what actually happens later. Typically, the capital expenditure falls short of estimate to give in to rising revenue expenditure demand. Surprisingly, some government departments show a drop in expenditure allocation (Law & Justice, Mines, Supreme Court, huge drop in Petroleum ministry outlay, etc).
The Budget is high on expectations from industry. Near 15% growth in revenues have to come from excise, and the Budget document shows a near 30% increase in customs duty revenue. The Budget banks on the momentum of economic growth rather than give any thrust to the economy.
The corporate sector does not get anything. Partial withdrawal of stimuli by raising excise duty by two percentage points and increase in MAT by three percentage points is what they have got. Demand continues to be strong and governments for years have not bothered with increasing the supply side. In this context, companies can easily pass on the increases to the buyers or at worst live with slightly lower margins. Of course, there are the usual suspects in the industry basket who seemed to have successfully lobbied overtime and got honourable mention in the Budget speech itself. A reduction of duty on ‘magnetron’, used in Microwave ovens, which may bring down the cost of a microwave by around Rs200; a 5% reduction in duty on medical equipment; a duty cut in Rhodium (a precious metal used in jewellery) and reduction of duty on watches that are imported! These kinds of actions definitely raise questions. The corporate sector appeared relived that the last year’s undeserving cut in excise duty was only partially taken away. For the corporate sector, this Budget does nothing good. Service tax remains undisturbed, waiting for convergence with GST (goods & services tax).
Imposition of MAT should impact some of the infrastructure companies marginally. However, it may not impact earnings severely. The action of putting more money in the hands of taxpayers is good for sectors like automobiles, FMCG, etc. Of course, it is likely that the lowering of income tax may result in higher savings. The introduction of the Direct Tax Code (DTC) and uniform GST now have a deadline (1 April 2011) for implementation. I hope they are not postponed further. A breather for the mutual fund industry gives them another year to continue with corporate and banks’ money.
For the markets, the Budget is a big non-event. Yes, there was a holding of breath in the run up to the Budget. But nothing unexpected has happened to disturb the market. If anything, a few more rupees are available with some stock market investors, who also pay some taxes. This Budget does not give the market any reason to move either way. What happened after the Budget was more of a relief rally. What could happen is that FII money, if it was waiting on the sidelines, anticipating a bad Budget, could come into the market and spark a short-term rally. In my view, our markets are fairly valued, with high growth expectations. No need to go through the Budget to take any investment decisions. Interest rates should stabilise since the borrowing plans of the government do not seem too extravagant.
One interesting development is the opening up of banking licences to the private sector. It would be interesting as NBFCs start to talk with small private banks for M&As (mergers and acquisitions). We could also see some of the ‘hidden’ owners of old-generation private banks breathing a sigh of relief as this will provide the opportunity to legitimise their holdings. The valuation of NBFCs (those perceived by the markets as being desirous of getting into banking) and small private-sector banks will turn volatile. Of course, this is negative news for PSU banks. More competition as well as loss of whatever talent is left, is on the cards.
A cautionary note: I have yet to read and analyse the Budget fine print.
AMFI’s Investor Awareness’ Committee, created at the behest of SEBI, may end up blowing up a lot of money for no reason
Even as investors are turning their backs on mutual funds (MFs), regulators and the industry have suddenly woken up to ‘protect’ and ‘educate’ them. The preferred solution? Spending crores of rupees in advertisements. Sometime ago, the Association of Mutual Funds in India (AMFI) formed two committees named ‘Investor Awareness’ and ‘Investor Connect’, under a directive from the Securities and Exchange Board of India (SEBI). These committees are now in action.
The Investor Connect Committee has commissioned a survey on what investors think and how they behave, while the Investor Awareness Committee is planning to, well, spread awareness about mutual funds. According to a chief executive (CEO) of an asset management company (AMC), AMFI has around Rs9 crore in its kitty, of which Rs3 crore to Rs4 crore will be spent by these two committees. However, one of the committee members denied that such a campaign was being planned.
Apart from insisting that these committees be set up, SEBI also suggested the names of the committee members. According to sources, the Investor Awareness Committee is planning to make a proposal to spend Rs40 crore on investor-awareness advertising. Apparently, the Committee is hoping to seek SEBI’s support to tap the Investor Education and Protection Fund (IEPF) for a sum of Rs40 crore; receiving approval from IEPF requires clout.
It is not clear whose brainchild such a massive ad campaign is. AMFI believes that an advertising blitzkrieg will increase investor awareness, but there is no study to substantiate a correlation between ad campaigns and investor awareness. Ad campaigns will only fill the pockets of large media houses. Maybe that would ensure a pro-industry and pro-regulator stance from the media.
The members of the Investor Awareness Committee include Sundeep Sikka, CEO of Reliance Mutual Fund; Kailash Kulkarni of Kotak MF; Srinivasan Jain, marketing head of SBI MF; and Sanjay Kaley of Fidelity Mutual Fund. This Committee has prepared a white paper on the state of the mutual fund industry and what needs to be done to make it grow. India’s investor population has plummeted from 20 million in the 1990s to eight million now (according to the Swarup Committee report of 2009), despite a booming economy and a bull market.
One of the reasons for the slow growth of the industry and the dwindling investor base, according to Investor Awareness Committee, is that investors are unaware of the benefits of equity and mutual fund products. So, it has decided that the way to make them aware is by unleashing advertisements.
Following SEBI’s ban on entry load in August 2009, MF distributors found it unprofitable to sell MFs. Subsequently, SEBI directed AMCs to implement trail commission, whereby commission is paid to the new distributor if a customer decides to change his broker/distributor. This has only led to a game of poaching assets under management (AUM) among the AMCs and fund distributors.
Industry sources indicate that the Investor Connect Committee has commissioned the Indian Market Research Bureau (IMRB) to do a study on investor behaviour. The Committee and the research agency are trying to study something which is already known.
It remains to be seen whether such workshops and seminars on investor awareness bring about tangible benefits or whether investors need it at all.
Our email queries sent to Sundeep Sikka, AP Kurien of AMFI and Srinivasan Jain remained unanswered.