Atul
Kumar, Fund Manager – Equity, Quantum
Impact of budget on equities
Definitely not an as-per-expectation budget, the FM’s announcement were quite in contrast to market anticipation for some major recommendations to get the investment cycle moving and bring in fiscal consolidation – to reduce deficit and government borrowing programmes.
The government has moved towards improving tax revenues though. Specifically, the excise duties have been increased to 12% (which are levels that were before the financial crisis). Service tax has also been hiked to 12% (up by 2%), and more services are brought to tax net.
While last year the fiscal deficit was at 5.9%, this year it has been targeted at 5.1% of GDP for FY-13.
Direct tax rates remained pretty much the same, though personal taxes saw a minor reduction, though corporate tax rates remained constant. Individuals with income up to Rs. 10 lakh can invest up to Rs. 50,000 which will be allowed as tax deduction.
Rs. 50 trillion has been budgeted for infrastructure spending for the next 5 years, along with proposals that would help infrastructure companies to ease some current issues and access foreign credit.
All in all, a very plain budget, that does not seem to have much relevance on long-term investing. India is likely to maintain a GDP growth in the 7% range over the next couple of years. Events like the Union Budget are just that – an annual event – which should not cause long-term investors reason for speculated grief. Equity investors should consider such events in the light of the long term view, and that as of now surely seems to be ‘India Shining’!
Chirag
Mehta, Fund Manager – Commodities, Quantum
A war against gold?
The further hike in import duty by FM will surely have an adverse effect on the development of gold market in India. The customs duty has been increased to 4% (from 2%) which is actually double of the previous levy and comes after nearly an equal hike that took place in January earlier this year. Duty increases have been on a spree since July 2009 when the reform process for gold markets was reversed. The duty increases currently total to a whopping increase of more than 10 times.
Will this serve the purpose?
Most probably not! It is doubtful whether these steps would have much impact on the buying behavior beyond the short term. The price sensitive Indian consumer may refrain from buying in the short term since there is a sentiment impact of a sudden increase in price owing to the duty added to already prevailing high prices.
Prices have been trending upwards over the past few years. However, even significant price rises over the past few years have not dithered consumers from purchasing more gold. Rather, there has been record consumption despite these price hikes. Hence, a 2% increase in duty may not have much impact on consumption patterns.
The real story
Even in the past, policymakers have tried to discourage gold consumption but India’s affinity towards gold still holds strong. There have been a variety of measures adopted towards restricting gold consumption, right since our independence. However, all these measure have met with little success. Thus, it is strange that the government should avoid addressing the underlying issues that drive gold consumption, and rather attempt to dissuade development of gold market in India in totality. The duty increases would probably help fill government coffers, but it’s unlikely that it would have any other significant impact on the demand of gold.
The side effects
Going back to times when customs duty was significantly high, a major portion of gold consumed used to come by way of smuggled imports. There has been a continuous increase in duties during the last 3 years but it is still low as compared to what used to prevail when a large portion of gold requirement was obtained through unofficial channels.
Table: Events where customs duty has undergone change in the recent past, comparing the price of gold on the day of hike with price of the day before.
|
Date |
Cutoms Duty( incl cess Rs. per 10 grams) |
Gold Price before taxes and duties |
Gold price after taxes and duties |
Taxes and duties as a % of gold price |
|
3-Jul-09 |
103 |
14,341 |
14,618 |
1.90% |
|
6-Jul-09 |
206 |
14,240 |
14,620 |
2.70% |
|
25-Feb-10 |
206 |
16,232 |
16,636 |
2.50% |
|
26-Feb-10 |
309 |
16,479 |
16,989 |
3.10% |
|
16-Jan-12 |
309 |
27,182 |
27,822 |
2.40% |
|
17-Jan-12 |
2% (approx 560) |
27,174 |
28,068 |
3.30% |
|
15-Mar-12 |
2% (approx 541) |
26,485 |
27,351 |
Like what you are reading?
Login to get instant access to this article and many other such articles on business
development, success stories and industry updates.
Don't worry ... it's FREE! OR
Have a query or a doubt?
Need a clarification or more information on an issue? Cafemutual welcomes all mutual fund and insurance related questions. So write in to us at newsdesk@cafemutual.com Click to clap
Disclaimer:
Cafemutual is an industry platform of mutual fund professionals. Our visitors are requested to maintain the decorum of the platform when expressing their thoughts and commenting on articles. Viewers are advised to refrain from making defamatory allegations against individuals. Those making abusive language or defamatory allegations will be blocked from accessing the web site.
0 Comment
Be the first to comment.
More than 2,07,000 of your industry peers are staying on top of their game by receiving daily tips,
ideas and articles on growth strategies. Join them and stay updated by subscribing to Cafemutual newsletters.
Fill in the below details or write to newsdesk@cafemutual.com
and subscribe to Cafemutual Newsletter now.
Cafemutual is an independent media platform and focuses on providing knowledge and information for the benefit of finance professionals. We do not promote any particular brand or asset category.
|
