Budget 2010-11: Cheers for the Tax payer

According to Pranab Mukherjee, Minister of Finance "The union budget cannot be a mere statement of government accounts. It has to reflect the government's vision and signal the policies to come in future." Viewed in the context of this statement, the Union budget presented by the FM on 26th February 2010, is a precurser of the changes envisaged during the remaining tenure of UPA II government.

FM has enumerated the undernoted challenges before the government:

• Quickly revert to the high GDP growth path of 9%, and then find the means to cross the 'double digit growth barrier'.
• Harness economic growth to consolidate the recent gains in making development more inclusive within a fixed time frame.
• Remove weaknesses in the government systems, structures and institutions at different levels of governance.

The message of the FM is pretty loud and clear: Growth cannot be sacrificed at any cost. Some economists may term the budget as inflationary, but the govt. is confident that the growth in demand complimented by augumenting the supply side mechanism can stiill avoid an inflationary bias, while steering the economy on the growth trajectory. Budgetary allocation fo infrastructure development has been raised to Rs.1,73,552 crores (46% of total plan outlay), and spending on social sector has gone up to Rs.1,37,674 crores (37% of total plan outlay). Augumenting fresh resources to the tune of Rs.75,000 crores through disinvestment of PSU stock and 3-G spectrum sale will enable the FM to reign in the fiscal deficit to 5.5% in 2010-11, as against 6.9% envisaged in the revised estimates for the year 2009-10.

In his endeavour to deliver inclusive growth, FM has made sure that while selective subsidies and cash subvevtion would continue to be made available to the weaker sections of the population, the burden of taxes shall be shared amongst a large cross section of the population rather than a handful of tax payers. The tax bonanza to IT payers is a step in this direction. The revision of tax slabs upwards will lead to a substantial cash in the hands of individual tax payers which will give the necessary boost to consumption and saving, and lead to the feel good factor amongst the honest tax payers of the economy. Whereas these measures would lead to a revenue loss to the govt. agg. Rs.26,000 crores on the direct tax front, shall be more than made up by the additional revenue of Rs.46,500 crores through indirect taxes including service tax. There has been an appreciable shift towats indirect taxes to ensure inclusive participation in taxation.

In meeting the third objective, FM has spelt out the following initiatives:

• Tax reforms: Roadmap for role out Goods and Services tax (GST), and the Direct Tax Code (DTC), wef 01.04.2011 has been laid. This will lead to uniformity and simplicity in the tax structure.
• Nutrient based fertiliser policy already notified shall be applicable from 01.04.2010. FM has spelt out that Kirit Parikh committee recommendations on deregulation of motor fuels shall be taken up by the cabinet soon.
• Companies bill 2009, will address issues related to 'Corporate governance'.
• National Clean Energy fund will encourage research in innovative projects and will ensure use of alternate energy resources like solar and wind energy.
• Unique Identification Authoriry of India (UIDAI) under the Charmanship of Nandan Nilekeni will be able to roll out the first set of UID numbers in the current year.

Individual Tax payers owe a special thanks to the FM for the special IT bonanza in this years budget.

Banks to move from BPLR to 'Base rate': Implications

The issue of Banks differentiating between old and new borrowers has come under the scanner of 'Competition commission'. Existing borrowers feel cheated when their bank offers a lower rate of interest to the new borrowers, while they are not allowed a reset for their existing outstanding loans. If they want to liquidate the loan and move to another lender, they are required to pay a hefty pre-payment penalty ranging anywhere between 1-3%. Banks have justified this juglery on the pretext that they need to protect their Net Interest margin (NIM), and the banks can offer loan reduction to existing borrowers only with a time lag, because they need to overcome the mismatch between their asset and liability buckets. Moreover, with more than 50% of the loans sanctioned at sub-BPLR rates the concept of the BPLR has been rendered redundant.

To enable the banks to set their lending rates in a scientific and transparent manner, the Reserve Bank of India has proposed a system that will replace the existing system of benchmark prime lending rates (BPLR) with base rates. The formula for calculating the base rate will take into account the cost of deposits, cost of complying with CRR and SLR requirements, and the need to retain a profit margin. There will be a markup depending on the cost of operation for a particular type of product and premiums for credit risk and tenor of loans. The existing BPLR system does not quickly or adequately respond to changes in policy rates, thus reducing the effectiveness of monetary policy. Transparency will be enhanced under the new syatem. The priority sector lending at sub-BPLR rates will be unaffected as the base rates will be set much lower than the existing BPLR of the banks.

Based on the 2008-09 numbers, the base rate varies from 5.22% for Citi to 8.91% for OBC. Broadly speaking, foreign banks have the lowest rate followed by public sector banks and then private banks. Currently, the PLR of most banks are more or less the same. It would be interesting to find out  that once the base rate scale is known to all potential borrowers and varies according to a uniform predetermined formula, potential customers would have a choice provided the banks have the willingness. With savings bank deposit rates set to be calculated on daily balances from 1.4.2010, banks profitability will be under some more pressure. Most Banks have sought period till the end of June 2010 for implementation of the new lending regime.

Speculation: A blessing in disguise!

We take many decisions in our day to day life, without really knowing the outcome of those decisions. There is always a probability of success or failure of that decision. For example, during the rainy season, we have to take a decision whether to wear a raincoat or not, based on our expectation whether or not it will rain during the day.What exactly is speculation? Speculation in respect of the financial world includes the buying, holding, selling, and short-selling of stocks, bonds, commodities, currencies, collectibles, real estate, derivatives or any valuable financial instrument. It is different from buying because a speculator does not buy goods to own them, but to sell them later. The reason is that he wants to profit from the changes in market prices. Speculation is one of the market roles in  financial markets. The others are hedging, long term investing and arbitrage. Speculators do not plan to keep an asset for a long time.

Common features of non speculative markets are:

• Almost total absence of leverage, and has limited depth
• Shares, bonds and other assets are bought primarily for cash and not on credit
• The expectations of capital gains are low
• Trading volumes are low, and trading is dominated by a small group of people.
• The markets are traditionally undervalued markets

A majority of the Asian markets, including India were non-speculative markets till the 80's. In India, in the 70's and 80's people bought homes only to live in them. Gold & silver held by the families were non-speculative in nature. With the globalisation of asian economies an element of speculative interest has been built in these markets. There has been a lot of interest in these markets from the foreign investors largely because of the huge growth potential, as most of these markets had been depressed for long, because of the lack of speculation. The Asian markets led by China and India are currently going through a long term "bull phase", which is marked by higher speculation.

According to John Templeton "Bull markets are born on pessimism, grow on scepticism, mature on optimism, and die on euphoria.” An investor should not be unduly worried about the higher volatility in our markets, because just like small cap growth stocks tend to be more volatile than established blue chips, emerging markets tend to be more volatile than matured western markets. But then they also have the potential to deliver higher returns.

However, investors must be aware of the speculative excesses, which often cause the end of bull markets. Here are some of the symptoms of speculative excesses:

• The long the uptrend in the market, the higher is the likelihood of creation of a mania or 'herd instinct'. Long term bull markets survive only if there are intermittent corrections within the bull run
• In the maniac phase of the bull market the mood is euphoric, and even dud stocks rise appreciably
• The number of new issues is very high
• The mania is whipped by the media, because their business survives on creating the hysteria.
• Towards the end of the maniac phase, insiders resort to double standards - painting a rosy picture about their businesses in public but paring their holdings in the company
• Sometimes it results in surfacing of 'Ponzi schemes' and 'Swindlers'. The likes of Harshad Mehta and Ketan Parikh are the creations of the excessive speculation phase.

Sir Isaac Newton amply sums up this frenzy when he says: “I can calculate the motions of heavenly bodies, but not the madness of people”. Speculation is good for the markets, untill the above symptoms appear. Investors can safely ride the current long term bull market in India, but must guard against the above factors to protect their interests.