Of Budget and financial planning

The Budget has not done anything, which is likely to impede this growth. On the contrary, the government is keen that the growth should continue.

The annual ritual is over. The long wait, the expectations, the fears of Budget 2007 are behind us. It is now time to analyse the vision and direction Finance Minister P Chidambaram has laid before us.

Broadly, one could assess the impact of the Budget on personal financial planning from two angles:

The economic angle: The returns from all investments - debt, equity or real estate - are largely determined by economic performance. How will the Budget affect the economy and, consequently, the returns we can expect from the different asset classes?

The taxation angle: Any change in taxation policy requires us to make suitable changes in our portfolio to minimise the tax outgo. The FM indicated he is working on a comprehensive new taxation policy. As such, he did not make any significant announcements in the Budget. From the taxation angle, we may have to make only some minor adjustments.

Equity
The industrial and the services sector, which form the basis of the stock markets, are growing at a fast pace. The Budget has not done anything likely to impede this growth. The government is keen for the growth to continue.

• The fiscal deficit is within the targets and government is committed to meeting future targets too in this regard.
• Tax collections are very buoyant are likely to continue.
• There is increase in the per capita income, savings rate and investment rate.
• Increasing thrust on infrastructure, rural development and health.
• Forex reserves to be utilised for infrastructure.
• Reduction in Central Sales Tax and moving towards unified Goods & Services Tax in a timebound manner.
• Cut in customs duty and some small tinkering with excise rates.
• Many of these are long-term measures, with a view to keeping the long-term growth story intact. Therefore, India's GDP growth is expected to continue at 8-10 per cent pa. If that be so, equity is likely to deliver good returns.

The short-term measures essentially targeted towards containing inflation have not been well received by the investing community. The adverse impact on cement and IT is likely to be marginal and is not expected to affect the overall growth trend. Also, remember the recent correction in the markets is more due to global factors and nothing to do with budgetary provisions.

There has been no change in the Capital Gains Tax or the Securities Transaction Tax. So from the taxation point of view, there is no change as far as investment in equity is concerned.

Debt
The high pace of the Indian economy is resulting in increasing demand for credit. Besides this, in the last five to six months, there has been significant increase in inflation. This has put a lot of pressure on the interest rates and they have been moving upwards.

For an investor, this is good news. But for a borrower, this is proving to be a nightmare, especially for home loan borrowers who have availed of such loans on floating interest rates.

With the government taking a number of measures to curb inflation and excessive growth (in, say, areas like real estate), things should come under control by April/May.

If this happens, one could see interest rates stabilising or maybe even move downwards. Thus, as an investor, it might be a good idea to lock in at higher rates for long tenure. If you are planning to go for a home loan, maybe you could wait for a few months.

As regards the changes in dividend distribution tax from 12.5 per cent to 15 per cent, the change is marginal.

For investors of liquid fund/money market mutual funds, the rise in DDT from 12.5 per cent to 25 per cent is pretty sharp. But there is an option. The returns from liquid funds and floating rate funds have been quite comparable.

Besides, one can invest/withdraw funds in/from floating rate funds with comparable ease. Hence, a retail investor could switch from liquid funds to floating rate funds.

Real estate

This is one area where the picture is not very clear.

On the one hand, the demand far exceeds the supply. Along with higher income levels, increasing costs of inputs such as steel, cement, etc, and low home loan interest rates, have resulted in real estate prices doubling in the last 12-18 months.

Developers also feel the recent budgetary announcement of the removal of certain tax benefits on houses with areas less than 1,000-1,500 square feet and increase in works contract tax rates, is likely to add to the costs. The prices may still increase.

On the other hand, some experts feel the sector is overheated. Concerned the overall economy could be hurt badly if the real estate bubble bursts, the government has made it more difficult and expensive for developers to access bank funds.

RBI measures such as increase in repo rates and hike in CRR have led to a significant increase in home loan rates. This could affect demand and may lead to some cooling down in prices.

All in all, the long-term economic outlook still looks promising. Therefore,

• One can continue to expect decent returns from equity over three to five years.
• Debt returns are now quite attractive compared to two years ago, and may remain so for some time.
• Real estate should continue to do well in certain pockets where the buying is for actual use, but could see correction in places where the buying has been for investment.

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