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Mar 28, 2012 05:52 PM IST | Source:

The impact of key Budgetary reforms on investor: CRISIL

Read this space to know what the key budgetary reforms were and how they would affect your investment world. Crisil Research has listed down a few such reforms and its impact on retail investors.

1. Rajiv Gandhi Equity Savings Scheme would help increase equity penetration

Rajiv Gandhi Equity Savings Scheme is proposed to allow for income tax deduction of 50% to new retail investors who invest up to Rs 50,000 directly in equities and whose annual income is below Rs 10 lakh. The scheme will have a lock-in period of 3 years.

Equity penetration in India is very low. For every Rs 100 that is saved, only about Rs 5 is invested in equity-oriented assets (including mutual funds). The remainder is allocated across fixed income products, majority of which are bank deposits. The Budget has taken baby steps to attract new retail investors into the equity markets. The proposed Rajiv Gandhi Equity Savings Scheme will help grow retail penetration in the equity markets.

2. Tax-free infrastructure bonds may offer good investment opportunities for retail investors

The tax-free bonds issued in 2011-12 for financing infrastructure projects had received a very positive response from investors, as these created an additional avenue for tax savings. The increase in the limit is expected to see an increasing appetite among retail investors for these bonds. This will also, in parallel, enable long term funding for the infrastructure sector, which is critical for economic growth.

3. Reduction in STT would reduce transaction cost for mutual funds

Securities transaction tax (STT) has been reduced by 20% (from 0.125% to 0.1%) on cash delivery transactions. STT is payable on all transactions done on the stock exchanges.

The reduction of STT will lead to a reduction in the cost of all delivery-based transactions that are done through the stock exchanges. This move will benefit both direct investors and mutual funds, including investors in exchange traded funds. The impact to the overall capital markets would be marginal since delivery-based transactions form a small component of overall transactions.

4. Deduction in respect of interest on deposits in savings accounts up to Rs 10,000 allowed

A deduction up to Rs 10,000 will be allowed to an assessee (individual or Hindu Undivided Family) with respect to any income by way of interest on deposits (not being time deposits) in a savings account with a bank, post office or cooperative society under section 80TTA.

5. Higher fiscal deficit could impact interest rate movement

The combined effect of lower tax and disinvestment receipts, and higher expenditure, mainly on account of subsidies, has pushed the fiscal deficit to 5.9% of GDP in the Revised Estimates for 2011-12. The fiscal deficit for 2012-13 has been pegged at Rs 5.14 lakh cr, which is 5.1% of GDP. Accordingly, net market borrowings through dated government securities to finance this deficit are enhanced to Rs 4.79 lakh cr. This would reduce the total government debt at the end of 2012-13 to 45.5% of GDP as compared to the Thirteenth Finance Commission's target of 50.5% of GDP.

According to CRISIL Research, the fiscal deficit for 2012-13 is likely to overshoot to 5.5% of GDP, thereby increasing the possibility of a higher-than-projected government borrowing programme. While interest rates are likely to soften, the pace of rate cuts by the central bank may be slow. CRISIL Research estimates the 10-year government bond yield to soften from 8.5% projected by end-March 2012 to 7.5-7.8% by end-March 2013 as against the earlier expectation of 7.3-7.5%.

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