Kotak Mutual Fund CEO Sandesh Kirkire
The core takeaways from the Union Budget were fiscal prudence and orientation towards growth. Fiscal deficit in 2012-13 was managed by slashing unplanned expenditure. The 2013-14 Budgetary estimate pegs fiscal deficit growth at 4.8 per cent year-onyear (yoy). In absolute terms, at 4.14 per cent expansion, it implies palpable moderation in deficit growth.
But, to achieve this target, GDP must improve as assumed in the Budget. The Central Statistical Office estimate for GDP growth in the third quarter for 2012-13 is 4.5 per cent. This is far short of the Budgetary assumption.
For the equities and the debt markets, a key takeaway would be the nature of government borrowing to partially fund the Budget. Higher government borrowing crowds out private sector borrowing and pushes up yields in the debt market, making capital relatively expensive.
The Finance Ministry is re-orienting policy towards managing growth. Were capital availability in the system to expand in tandem with nominal GDP (not adjusted for inflation), we could see a sizeable chunk of credit demand being met by increase in deposits.
The third quarter GDP growth for 2012-13 was estimated at 4.5 per cent, which is possibly the lowest in the decade. With lowering inflation, the RBI may cut policy rates. (This article was written before the Repo rate was cut on March 19).
From the mutual fund point of view, the Budgetary provision to extend tax benefit under the Rajiv Gandhi Equity Savings Scheme from one year to three years is a positive step. The scheme that targets new equity investors would allow for committed and longer-term equity investments.
The Budget has also reduced the Securities Transaction Tax (STT) on mutual funds drastically. The STT rates on unit purchases, sales and redemption has been slashed by over 90 per cent to 0.001 per cent. This will reduce expenses and help accrue gains for investors.
Additionally, the initiation of the 'know your customer', or KYC, standardisation is a welcome step and would help investors, provided this initiative is extended to other branches of the BFSI (banking, financial services and insurance) industry as well.
The increase in Dividend Distribution Tax (DDT) from 12.5 per cent to 25 per cent and the surcharge from 5 per cent to 10 per cent would reduce post-tax gains in the dividend option of debt schemes. However, the tax arbitrage between debt mutual fund schemes and other corresponding avenues remain.
SANDESH KIRKIRE
CEO, Kotak Mutual Fund(This is a sponsored article)
