The Finance Minister has presented the Budget and I believe that, keeping in mind India's macroeconomic challenges, this is a realistic Budget. The Finance Minister is facing up to the reality of our challenges and has come out with a fiscal deficit for March 2012, which is 5.9% - significantly higher than last year's 4.6%.
A 1.3 % increase in fiscal deficit is very high. In simple language it means, the amount of money the government is spending compared to what it is collecting has gone up to a gap of 5.9% of the total. This will put significant pressure on the Government of India, as it will have to borrow this amount in the markets, resulting in upward pressure on government securities market. This tends to make the government securities rates higher.
For the next year, the Finance Minister is budgeting 5.1% fiscal deficit against the current 5.9%, which is more realistic. It is challenging but I also believe it is achievable, though it will result in high government borrowing for next year as well.
Also read: Union Budget
In terms of the steps which the Finance Minister has taken for taxation, there is some benefit for individual taxpayers - their limits have been increased to zero tax up to 2 lakhs, 10% up to 5 lakhs, and 20% up to 10 lakhs. Earlier, it was 20% off up to 8 lakhs. So, anybody who is earning up to 10 lakhs a year will pay a maximum tax rate of only 20%. This I think is again, very friendly for the middle class average saver and is important in the context of the Government's ultimate plan, based on the Standing Committee of the Parliament where they would like to, in the long run, make up to 3 lakhs tax-free.
The second interesting aspect of the Budget is its savings account provision. For interest earned in your savings account, any amount up to Rs 10,000 has now been made completely tax-free. This will enable you to keep up to about two lakhs of rupees in your savings account and have virtually zero tax on the interest earned.
Also read: Highlights of Union Budget
For some specific sectors, such as the infrastructure and power sectors, the Finance Minister has tried to offer some benefits. But the most important from the point of view of an average saver again is that there are going to be Rs. 60,000 crores worth of tax-free bonds issued by NHAI, IRFC and other companies, double of Rs. 30,000 crores, which were issued in the current year. So again, you as investors and savers will get the opportunity to invest in some of these tax-free bonds in 2012-2013 as well.
Coming specifically to the capital markets, the Finance Minister has recognised the importance of capital markets and has given them some specific benefits. Number 1 is the Rajiv Gandhi Equity Scheme which allows you to invest Rs. 50,000 out of your income, get a deduction and invest it in equities, provided that you lock the amount in for three years. The amount which you have invested will be allowed as a tax deduction from your income of the current year. This move is aimed towards new investors and is only available for first-time equity investors. But it is importantly, a signal from the Finance Minister that he cares for the equity investor.
The second benefit which he has offered is reduced Securities Transaction Tax (STT) on every delivery transaction from .125% to .10% - again, a small change but a signal that he would like to see long-term equity investors in the market. These changes may not be largely material but they are signalling that the Finance Minister is sensitive to the markets.
On gold, the FM in this Budget, has increased import duty from 2 to 4%. For the current year, India is going to import 60 billion dollars of gold. India's entire current account deficit is 60 billion dollars. So gold imports are taking away a lot of India's foreign exchange. By increasing import duty from 2 to 4%, the Finance Minister hopes to collect revenues if Indians continue to import so much gold.
Also read: Union Budget 2019 vs. 2018
Beyond that, I would like to share my views on the market. Fundamentally, I think the stock market will be, at present, range-bound. On a Sensex basis, I think the market will range between 16000 on the lower end to 19,000 on the higher end and it will more or less play within this broad range for a while. In the long term, I think the India story is not about buying the broader stock market. For investors, the smart way of playing Indian equities is to be stock specific. Find individual stocks which are winners rather than trying to buy the broad market and look at these stocks from a fundamental viewpoint - regarding the quality of governance of Companies before you invest in them.
I wish you all happy investing through 2012-13
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