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Good, not great, budget for investors: FundsIndia
February, 26th 2010

By Srikanth Meenakshi and Shankar Bhatt,

We were listening to the budget speech from the perspective of an individual investor in the country. We were looking for measures that would enhance the participation of investors in the capital markets in the country. A budget could do this in many ways simply putting more money in investors pockets by reducing tax, encouraging tax-exempt investment contributions, making the investment process simpler etc.

So, how did this budget measure up along these lines? Lets take a look at what we heard in the budget and what we wished we had heard.

Taxes: On the taxes front, we had wished for two things clarification on the implementation of the direct tax code (DTC), and an intermediate rationalization of tax slabs before DTC becomes effective. On both fronts, we had news early on in the speech, the FM announced the governments commitment to implementing the DTC on its slated start date of April 1, 2011. Although we would have wished to have more clarity on the final shape that the DTC would take, this re-iteration of intent is very welcome.

And, the tax slabs were moderated significantly from where they are now, but still quite a distance from where they would be under DTC. We wish the FM had gone further in this direction. Especially disappointing is the non-movement on the lower end 1.6 lakh limit for zero tax stays as is. However, the intermediate slabs have moved from 3 lakhs to 5 lakhs, and from 5 lakhs to 8 lakhs providing significant relief for the middle class family. An additional Rs. 50,000 in the pocket for a Rs. 10 lakh earner would be very welcome.

80-C deduction: The budget disappointed in this front. While it proposed an additional Rs. 20,000 for specific infrastructure investments, it did not move the basic Rs. 1 lakh limit for all 80-C deductions. This number has stayed static for several years now, through massive increases in prices, especially of housing. Given how well this clause has contributed to increasing capital market participation by individual investors, it is a travesty that it is not getting the increase it merits.

Apex financial body: Although this will not have an immediate impact to the investor community, we note the setup of an apex financial body the Financial Stability and Development Council with interest. This body will have authority to co-ordinate between regulatory bodies to resolve issues. Given the current turf-war between SEBI and IRDA, setting up such a council was in our wish list, and were glad that this is being done. This will help the individual investors in the long run by bringing about more uniformity of regulations across bodies, which in turn will curb mis-selling of financial products to investors.

Other proposals: Among other proposals in the budget of interest to the investors, is the issuing of more banking licenses to increase the reach of banking services to hinterlands. While we are a bit cynical about the stated purpose (we would love to see how many of these licenses go to corporate financial behemoths, and how much they serve the rural areas), increasing competition in the banking sector is most welcome. In another proposal, the government has promised a Rs. 1000 contribution to NPS accounts opened this year with less than Rs. 12,000 annual contribution. While this amount itself is not much, it reiterates the governments commitment to the rather beleagured NPS scheme and its effort to provide financial security cover to the unorganized sector. Finally, the setting up of the Technology Advisory Group (under Nandan Nilekani) to oversee technology infrastructure ramp-up in the financial sector could yield interesting outcomes in how financial services are delivered in the country.

Overall, the budget is not quite a damp squib, nor is it a blockbuster. It takes a moderate step, but the good news is that it is in the right direction.

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