Union Budget Analysis – 2011

The Union Budget 2011-12 presented today, provided few reasons to smiles for individual tax-payers as the tax slabs for the general category has been enhanced to Rs 1,80,000 from Rs. 1,60,000. The measure will provide a uniform tax relief of Rs 2,000 to every tax payer of this category, besides moving closer to DTC rates, to be implemented from April 1, 2012. People above 60 years of age, as oppose to 65 earlier will now be under “Senior Citizen” preview and will enjoy an enhanced exemption limit of Rs 250,000. Also, a new category of very Senior Citizens, 80 years and above has been created who will be eligible for a higher exemption limit of Rs 5, 00,000.
However, an additional Rs 20,000 exemption limit seems largely inadequate amidst expectations of Rs 2,00,000. Also, no joy for women tax-payers as slab for them remain unchanged.
Hike in exemption limit will meanmore disposable income in hands of consumers likely to be channelize into savings instruments and hence more demand for personal finance products. Given high interest scenario, the short term deposits, debt focused mutual funds, FMPs are most likely to benefits. Also high yield is another reasons why individual would put the money into saving instruments than spending. Further reduction in senior citizen age would provide fillip for retirement products demand including insurance, health Insurance, Savings Schemes, Retirement homes etc. Higher exemption limit is icing on the cake. Implications are similar for new category of Very Senior Citizens created with people of 80 years of age.
The Union Budget 2011-12 has proposed Tax free bonds of Rs 300bn to be issued for infrastructure development. It will cover tax free bond issue from Warehousing Corporation, NHAI, IRFC and HUDCO. Although For retail investors, more infrastructure bonds issues may hit the market, providing them with choices. Also more issues could propel some rationalization of bond issues pricing & returns in the longer run. However, the impact is likely to be constrained as limit continues to be just Rs 20,000 (Under 80CCF) and hence low incentives to invest especially with people in the higher tax bracket. Also expectations of only modest returns over a high lock-in period of 5 years compared with 3 years in ELSS remains a major deterrent for individual investors, not properly addressed in the Budget.
The Union Budget 2011-12 proposes to allow the registered FIIs to participate in equity schemes of the mutual funds, subject to those foreign investors fulfilling KYC norms. This would enable Indian Mutual Funds to have direct access to foreign investors and widen the class of foreign investors in Indian equity market. It would also lessen the Industry’s dependency over corporate money. The move is especially more relevant for sectoral funds wherein FIIs are most likely to invests, taking advantage of strong Indian fundamental growth story e.g. Infrastructure, Power, Telecom etc. So for medium to long term investors, sectoral funds are likely to be the preferred bet.
Significant allocations have been made for creating infrastructure, which has a multiplier impact on the economy. During the budget, Rs 2,140bn has been provided for infrastructure development, up 23.3% from last year. This accounts for over 48.5% (46% last year) of the total plan allocation. Further, the budget empowers FIIs to invest in Indian Infrastructure up to $25bn now, from $20bn earlier. It has also been proposed to further increase it to $40bn in coming times. Considering FIIs over the years have been the primary driver of Indian stock markets, the move suggest an upside for Infra related funds. Additionally all supporting sectors such as heavy metals, construction, engineering and technology also stands to benefits from infrastructure allocation. Thus mutual funds, Bonds, Corporate FDs and direct equity exposure are expected to continue attract investor’s response.
To provide stability to real estate sector, The Union Budget 2011-12 has increased the 1% interest subsidy on housing loans of up to Rs 15 lakh, where the cost of house does not exceed Rs. 25 lakhs. The existing interest subsidy is on loans of Rs10 lakh where the cost of house is Rs20 lakh. The proposed cut in the interest rates will lighten the EMI burden for borrowers and hence more affordability and demand. It will also benefit for the housing finance companies in maintaining the traction in the mortgage loan market, resulting in healthy competition amongst players. This could reflect in more benefits being offered to home buyers.
Also the Budget has proposed to raise housing loan limit from Rs 20 lakh to Rs 25 lakh for priority sector lend. This will result in enhanced affordability in the hands of the customers with an additional Rs 5 lakhs limit to enjoy the subsidy & interest rates benefits under priority sector lending tag, likely to result in higher demand for home loans at individual level. Also, it will reduce the cost of the funds for developers, encouraging them to disburse more housing loans & making housing loan market more competitive.
The Budget has mixed implications for Health Insurance. Earlier only patients under insurance coverage were under the service tax bracket, but in Union Budget 2011-12 the government has expanded its scope of taxing by bringing even non-insurance patients under the tax bracket. Also since many healthcare services have been brought under service tax ambit, cost of healthcare services for firms will rise and the same should reflect in the premium charged by them.
On the other hand, healthcare allocations have been increased to Rs 267.6bn this year which should mean better technology, better infrastructure as well as healthy competition, thus resulting into competitive pricing. This might prevent firms from charging high premiums. Also, the upcoming health insurance portability would mean the competition high amongst players. So high cost of healthcare services and inability to raise premium amounts could affect the new products launches in health insurance, limiting the choice for investors.
The Union Budget 2011-12 has laid a special emphasis on reducing the compliance burden of small tax payers by introducing simplified return form called 'Sugam'. Also, to fast track the disposal of cases related to taxes by the settlement commission 3 more Benches of the Commission are proposed to be set up. Both seem to be a positive step toward reforming the tax filing process.
Eligibility for pension under Indira Gandhi National Old Age Pension Scheme for BPL beneficiaries reduced from 65 years of age to 60 years. Those above 80 years of age will get pension of Rs 500 per month instead of Rs 200 at present. This will benefit very senior citizens with more disposable income in their hands however; the amount is most likely to be spent on their livelihood as they belong to BPL families.