Monsoon will be a key variable for market

Considering the volatile market conditions, the government's disinvestment plan for the next financial year, even though trimmed, still looks formidable. Plus, most PSU shares are depressed as they are mostly commodity and oil stocks. The government has to accelerate strategic stake sale in order to be able to achieve the target, says Rashesh Shah, Chairman and CEO of the Edelweiss Group. Excerpts from an interview:

What is your view on Budget 2016?

The Union Budget 2016-2017 has signalled the government's intention to remain responsible to fiscal targets, while at the same time being cognizant of the investment and consumption challenges posed to the Indian economy. Adhering to the 3.5% fiscal deficit target for FY2017 has been a big positive emerging out of this budget. While rural, social and infrastructure sector reforms have been the major thrust of this Budget; I take it to be a balanced and progressive budget which has addressed all the major panaceas facing the economy. While there has been lower than expected allocation for recapitalisation of public sector banks, I feel it will actually be a positive step pushing the Banks to be proactive in balance sheet clean up.

The fiscal deficit target was one major talking point in the run-up to the Budget and the FM has set all speculation at rest by sticking to the 3.5% numbers. But at the same time he is betting too much on a significant revenue growth, a sizeable disinvestment and mopup from spectrum sale to achieve that target. Does that make the target look daunting?

We believe that the tax revenue growth expectation of 11.7% YoY and nominal GDP growth of 11% YoY is realistic and indeed conservative. The overall fiscal arithmetic seems to be building in some cushion on crude oil prices. However, the reliance on revenue of INR1trn from telecom spectrum and the divestment target of INR565bn is optimistic.

The government's disinvestment revenue is falling far short of target this year. We have no guarantee the market will do well next financial year and all the share sale candidates are commodities businesses. Does not the share sale target for FY17 look a little tight?

Surely going by the track record, the divestment target of INR565bn (much higher than FY16 RE of INR253bn) appears optimistic. Volatile market conditions have affected the government's disinvestment plan, which mostly has commodity and oil stocks in the pipeline. However, target is achievable if the strategic stake sale amongst PSUs is accelerated. One has to wait and see.

The fiscal deficit target was one major variable in all talk about further rate cut by the RBI. With the big push on agri side to address supply side issue, do you think RBI will be too happy to go ahead and cut rates now? If so, how much rate cut do you expect in 2016 and what are the other key variables now?

The budget sticks to the fiscal consolidation path and the fiscal math is also largely credible. This should create space for monetary easing - we foresee scope of another aprrox.75bps of easing by RBI during FY17. The key variables to watch out will be monsoon this year as it will shape the CPI trajectory.

The government has no doubt spent a lot on rural sector and infrastructure despite limitations. Do you think that can provide the economy the much-needed legup in times of a slowing global economy? Do you buy the government's GDP growth targets for FY17?
Assumption of 11% nominal GDP growth in FY17 and an 11.7% increase in tax revenue appears credible to us. The rural focus of the budget, does provide impetus to the stressed rural economy. Rural demand recovery may be supported by enhanced rural expenditure, but its impact will take time to materialise. In our view, a well distributed monsoon along with the Fiscal push shall bode well for the overall economy in the medium to long term.

The bank recapitalisation amount was not something to tom-tom about and the government instead provides for NPA cleanup and signals consolidation in the industry. What is your reading of the ills afflicting the banking sector and how the government is going to address it?

Bank recapitalisation was lower than what was estimated, especially in the backdrop of heightened asset quality pressure. However government highlighted that this was one of the tranche and if need be they will further augment capital. The government understands the criticality of the issue and has proposed a comprehensive Code on Resolution of Financial Firms to be introduced in the Parliament during FY17. This Code, together with the Insolvency and Bankruptcy Code 2015, when enacted, should ideally provide a comprehensive resolution mechanism. This is a step in the right direction.

Source: Economic Times

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T N Ninan: Budgets - the long view

The flood of commentary that follows the presentation of a Union Budget focuses quite naturally on the immediate numbers. However, it is the long view that often proves more educative. Taking the perspective of the last decade, budgetary numbers present some clear trends. To start with, central tax revenue and GDP will have remained in lock step: GDP (at current prices) is expected to have grown 3.4 times over the decade to 2016-17; so is budgeted tax revenue for next year. However, the states’ share of this revenue will have multiplied 4.7 times, leaving net central tax revenue to grow barely three-fold — and therefore slower than GDP. That the fiscal deficit has been controlled, regardless, is because of the spectrum bonanza that the government has engineered.

The contribution of different taxes to the total tax kitty has seen changes. Income-tax revenue is budgeted to have grown significantly faster than GDP, multiplying 4.3 times over the decade. Since GDP has grown only 3.4 times, people are now paying a greater share of their income as tax. Companies have not been as generous — corporation tax revenue is budgeted to have grown at nearly the same speed as GDP. Don’t blame the companies, though. The stress in the corporate sector has caused the share of profits in GDP to drop to a low point. If companies start doing better and reporting profit growth, corporation tax revenue will see a boost, not just in absolute terms, but also in relation to GDP.
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Among indirect taxes, the star performer is service tax, whose revenue next year is budgeted to be a massive six times greater than a decade earlier. This is not just because service tax rates have been raised, but also because the coverage of the tax has been expanded. However, the other indirect taxes have disappointed. Customs duties, for instance, are budgeted to grow next year to just 2.8 times the level a decade earlier. This could indicate that duty rates have been dropped, making the economy more open than before, or that there has been a change in the import mix, towards items that attract lower duty. Alternatively, more imports are duty-free because they feed exports. Whatever the reason, the collection rate for Customs duty has dropped to barely 8 per cent of total imports in the last full year, compared to about 9 per cent of imports a decade earlier.

Finally, there is the other underperformer, excise duty. Revenue from this is budgeted to grow next year to just 2.7 times the level a decade earlier — making it the slowest-growing tax item, and growing slower than GDP, although the share of manufacturing in GDP has not fallen. The primary reason for the slippage is probably the fact that excise duties were lowered in the wake of the financial crisis of 2008, and are yet to be taken back up to the level that prevailed earlier. Perhaps finance ministers have stayed their hand because imposing higher excise duties might affect already depressed demand for a range of goods.

What conclusions should one draw from these numbers? First, the faster growth of revenue from direct taxes (on income and corporate profits) is to be welcomed as it makes the tax system more progressive. That customs duties are growing slower than both GDP as well as imports is also to be welcomed, if it can be confirmed that this is because duty rates have dropped and made the economy more open. However, the fact that taxes on manufacturing are growing slower than GDP should cause concern. Overall, the government’s total expenditure in relation to GDP is the same as it was a decade earlier. This tells us that, for all the excitement over annual budgets, finance ministers have little leeway for introducing change until the share of taxes in GDP grows. That will happen when the economy recovers momentum — corporate profits will grow and yield more taxes, and excise duty rates can be taken back to where they were before the 2008 crisis.

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C S C Sekhar: Budget - positive for agriculture

Budget 2016-17 contains many positive initiatives for agriculture and rural development. After an encouraging performance during the Eleventh Five-Year Plan period, agricultural growth stuttered in the last few years, with a growth rate of 1.5 per cent in 2012-13, followed by 4.2 per cent and -0.2 per cent in the next two years. The latest estimates from the CSO indicate that 2015-16 will be only marginally better, with a projected growth rate of 1.1 per cent. Notwithstanding two consecutive droughts, structural problems ranging from irrigation to input provision to marketing are responsible for this deceleration. The Budget attempted to address some of these long-standing issues faced by agriculture. The positive initiatives proposed in the Budget broadly relate to irrigation, rural infrastructure and marketing.

One of the major problems of Indian agriculture is its overdependence on the monsoon. Only about 45 per cent of the cropped area in the country is irrigated, which results in widespread production uncertainty. The Budget attempted to address this through the Pradhan Mantri Krishi Sinchai Yojana (PMKSY) with an outlay of Rs 17,000 crore. This programme aims to bring an area of 28 lakh hectares under irrigation, reinvigorate defunct irrigation schemes thereby benefiting 81 lakh hectares and also harness groundwater resources. These, together with the proposed long-term irrigation fund of Rs 25,000 crore, are positive initiatives for long-term growth in the agricultural sector.
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Credit constraints have been an important bottleneck in agriculture. The share of long-term (investment) credit has declined sharply from 55 per cent in 2006-07 to 39 per cent 2011-12. The target for agricultural credit in the Budget has been increased to Rs 9 lakh crore, which is Rs 0.5 crore more than last year. An additional provision of Rs 15,000 crore has been made for interest subvention. These measures should help relax the credit constraint to an extent. However, much will depend on the access to credit of the actual cultivators, which depends on the legal right to land and formal tenancy. Therefore, tenancy reforms and modernisation of land records need to be taken up urgently.

A revamped crop insurance programme has been announced recently to address crop losses due to vagaries of the climate. An allocation of Rs 5,500 crore has been made to this scheme. The attractive feature of the scheme is that there is no cap on premium and therefore, there is no reduction of the sum assured. However, this programme covers only production shocks whereas market (price) shocks still need to be borne by the farmer. This needs to be corrected through products for price/revenue insurance.

The Budget also proposes to encourage more states to undertake decentralised procurement through online procurement. The details of this scheme need to be worked out, though. There are also proposals to build a buffer stock of pulses and to automate three lakh fair price shops. About 585 regulated markets are proposed to be connected under the National Agriculture Market (NAM) programme. However, the states need to amend their respective Agricultural Produce Marketing Committee Acts (APMC) to implement this. This also involves a single licence across the state, single-point levy of market fee and electronic auctioning system for price discovery. At present only 12 states have amended their APMC Acts and action is needed from other states to fully operationalise this.

Agriculture also benefits from the allocations made for rural development. The biggest allocation for the rural sector comes from the increased grants-in-aid to gram panchayats and municipalities to the tune of about Rs 2.87 lakh crore. This is likely to translate into Rs 80 lakh per gram panchayat, which is substantial. These increases in allocations should spur rural spending, which in turn should help generate employment in the rural non-farm sector.

There are a few shortcomings in the Budget, though. There is little attempt to incentivise states to invest more in agriculture. Given that agriculture is a state subject, this is very important. Gross capital formation in agriculture (as a percentage of the gross value added in agriculture) has declined from 18.3 per cent in 2011-12 to 15.8 per cent in 2014-15. This sharp fall in investment during the last few years is in sharp contrast to the rapid increase since 2004-05. Much of the positive growth performance of agriculture after 2004-05 until 2011-12 was due to increased investment by the states. The Budget lacks effective proposals/incentives to encourage states to invest more in agriculture.

The second shortcoming is the absence of region-specific initiatives. Agro-climatic conditions vary greatly in India and any programme needs to factor in local conditions to be successful. Irrigation programmes under PMKSY and other programmes need to be dovetailed with district agricultural plans prepared by the states, to be successful. The success of many of the proposed initiatives - such as credit access or crop insurance - hinges crucially on correct identification of the beneficiary. Thus, modernisation of land records, establishment of secure property rights and undertaking of tenancy reforms are crucial to the success of many of the proposed initiatives.

Overall, however, this is an encouraging Budget for agriculture after somewhat lukewarm treatment received by the sector in the last two Budgets.

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The writer is Associate Professor, Institute of Economic Growth, Delhi University
csekhar@iegindia.org Source: http://www.business-standard.com

New options for saving capital gains tax

Until now , investors had only a few options to claim tax exemption on their capital gains. They could invest in bonds of National Highways Authority of India or Rural Electrification Corporation or they could buy a residential property. The Budget has given investors two more options. Individuals will now be able to save tax on capital gains by investing in start-ups directly or indirectly. However, these options carry much higher level of risk and investors should look at them if they have the requisite risk appetite.

Current tax-saving options
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The Income Tax Act provides for three types of tax-saving options. Under Section 80C, the investor gets a deduction for investing in eligible instruments. Under Section 87A he gets a tax rebate, wherein the tax that he is liable to pay gets reduced by the applicable amount. Then there are a range of options available for saving tax on capital gains. To avail of this benefit, the investor has to reinvest the capital gains he has earned into specified instruments.

New options

The Budget has introduced two new options that will enable investors to save tax on capital gains. Under Section 54EE, investors may invest in a fund-of-funds, which will in turn invest in startups. The government plans to raise Rs 2,500 crore annually for four years (Rs 10,000 crore altogether) in these funds. If investors reinvest their capital gains in such an approved fund, they will be exempted from paying tax on those gains. This investment avenue comes with a couple of pre-conditions. The amount you may invest shouldn't exceed Rs 50 lakh. The investment will carry a three-year lock-in and premature withdrawal will result in the tax benefits being reversed.

Under Section 54GB, if a person reinvests the long term-capital gains earned from the sale of a residential property in an eligible start-up, then again he will become eligible for exemption on those gains. This provision too comes with a couple of conditions. The individual investor should hold more than 50 per cent share in the start-up. In other words, he should be the majority shareholder in the entity. Second, the start-up should have utilised the amount to purchase new assets before the due date for filing tax return. What this effectively means is that small, minority and passive investments in start-ups will not make you eligible for tax benefit, and the amount invested by you must be effectively deployed by the start-up.

Higher-risk avenues

Both these new investment options represent a sea change from those that have existed traditionally for saving on capital gains. One option available has been to reinvest in a residential property, and the other has been to invest in certain eligible bonds. Investors have been comfortable using these options because they don't carry much risk. In the case of bonds, there is no risk to your capital. In case of residential property, too, there is only a very small chance of the value of the property dropping. Moreover, the investor has the freedom to either live in the property himself or rent it out.

These two new options are completely different because they are akin to equity investments, but with a higher degree of risk, since your capital will be invested in a start-up. While there is always a chance that you may receive a bigger payout a few years down the line, there is an equally high risk of the value of your investment getting eroded. As all of us intuitively know, new ventures carry a high degree of risk.

The failure rate among start-ups is very high, hence it is quite possible that you could end up losing the capital you have invested. The probability of loss is even higher when you invest in a start-up yourself, instead of via the fund-of-funds route. The latter at least offers the benefit of diversification. When you invest the entire amount in a single venture, you could lose all of it if the venture fails.

Check risk appetite

Different individuals have different levels of risk tolerance. The good thing is that now you have a bouquet of products available carrying varying degrees of risk and return. Closely examine your level of risk tolerance and choose an option that suits your risk appetite.

A very conservative investor who does not want to put his capital at risk should opt for the existing capital gains tax saving bonds.

Such an investor should be content with their relatively low rate of return. Conservative investors with a longer term outlook may consider the option of buying a property. Those with a moderate appetite for risk may opt for the fund-of-funds route, which provides some degree of safety via diversification.

Here, the investor gets access to a diversified portfolio of start-ups of which some may fail and some may succeed, but at the end of the day the investor can to come out a winner. Finally, at the high end of the risk spectrum is the option to take a majority stake in a single start-up. Here, the downside risk is huge, but the payoff can be equally spectacular if the venture succeeds.

The writer is a certified financial planner

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TAX TREATMENT OF CAPITAL GAINS

• If you earn long-term capital gains from sale of assets, you become liable to pay capital gains tax
  
• Residential housing and capital gains tax-saving bonds have been the traditional routes for investors
  
• Now, avoid paying capital gains tax by investing in a fund-of-funds that invests in start-ups
  
• You can also enjoy this benefit by buying a majority stake in a start-up
  
• Both these are high-risk options where the payoffs can also be very high

Source: http://www.business-standard.com