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With India’s GDP growth rate having regressed to its 10 year low, the upcoming Union budget would be excessively important in salvaging the situation.
Kotak Mutual Fund
Budget Season is here again! With economy having run into a morass, it is important that all engines go full throttle to salvage the situation and put the country on the growth path. The twin issue of fiscal deficit and current account deficit need to be addressed on a war footing.
The fiscal deficit is the excess of government’s expenditure in a year over the government’s receipts. For FY13, thisis expected to be around 5.3 percent of theGDP.The Current Account Deficit is the excess of India’s payments for imported goods and services to rest of world; against the total revenue receipts of India from the world. This is expected to be around 4.7 percent of the GDP in FY13.Quite evidently, the scale of these two deficits is huge and unsustainable over the long term.
We expect the Union Government to address these two issues. The high fiscal deficit has hardened the interest rates in the economy. As a consequence, the investments and consumption has declined and the GDP growth has moderated to around 5 percent yoy in FY13.On the other hand, the Current Account Deficit has weakened India’s currency, increased pressure on India’s payment commitments to the world, and has deteriorated the investment ratings of India.
For the Budget to address these two issues, we may have to look at slashing the non-productive expenditures, such as the subsidies. The surgical allocation of fertilizer and food subsidies is relevant in this regard. Procedural efficiency may be at the core in addressing the slippages and achieving effective results with limited allocation. However, the UIDAI efforts towards direct cash transfer would have a long term effect of reducing the pilferage.
Additionally, Manufacturing and Infrastructure sector is presently suffering from a plethora of tariff and non-tarrif barriers. Primary of these are the high capital costs, extended delays in departmental clearances and stringency of antiquated laws. While a tightened fiscal deficit would bring down the capital costs, regulatory reforms are needed to address other issues and reduce the entry barriers. Further movement in much delayed issues such as Land Acquisition bill, Direct Tax Code and Goods and Services Tax (GST) would also be gainful. The need is to prime up the investment cycle, create more jobs and consequently, more consumers.
The price discovery and trading mechanism of debt issuances has not reached anywhere near the sophistication levels of the equities. It is therefore essential that a comprehensive and a standardized trading platform be created that ensures price and issuance standardization, price discovery, settlement, transparency and wider retail investor participation. This would enhance the savings reach and augment the capital mobilization in the economy.
There is also a structural issue of taxation pertaining the Equity FoF schemes. These schemes essentially provide access to equities, but through multiple fund managers. However, the long-term capital gains from the open ended equities funds enjoys a tax-free status, while the capital gains from Equity FoF are taxed in similar proportion as that of a Debt fund. This must be rectified and the taxation status must be brought at par with regular the equities schemes.
Also, the fact that nearly 1/3rd of the floating stock is owned by FIIs; and that we have a total of about 2 crore demat accounts(after removing the multiple demat accounts, we may have no more than 75 lakh unique investors) highlights the need to expand the retail penetration of the equity capital markets.
While, the recently introduced RGESS is a good initiative in this direction, we need to be far more aggressive in our approach. Further the investment framework of RGESS is limited. Typically, open ended equity mutual fund schemes should also be allowed to receive investments under RGESS.
Moreover, ELSS is one of the few pure equities investment avenuesavailable with tax-savings incentive under section 80C.Despite that it, has to compete with other more widely known and long established investment avenues for a limited allocation of Rs 100,000/-. Even at that, a sizeable proportion gets chipped away automatically due to contributions in the pension funds. For that reason, we believe that ELSS allocation must have a separate tax ceiling incentive rather than being part of 80C. This would enhance the retail investor participation in the equities product, and reduce the risk-premium for the otherwise risk-averse salaried class.
There is also a need to have a relook at the EPFO investments. A large portion of working population has EPFO accounts that accumulate their provident funds. EPFO accounts, despite allowing investment of upto 15 percent of its corpus in equities does not do so, as EPFO is a quasi defined benefit scheme where the returns are indicated by the labor ministry every year. Subscribers should be given a choice to opt for NPS which provides a more functioning exposure to equities market and thus also access to equities market potential. As a nation we should move away from defined benefits towards defined contributions and provide a large chunk of investor’s access to equities. At the same time, this would enhance the depth of the equities market.
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