Wish list for Budget 2013 - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Wish list for Budget 2013 

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In this issue:
» India is a high food inflation economy
» Now customs duty to hit power supply
» Connection between stock markets and corporate investments
»  Billionaire investors selling gold. Should you?
» and more....

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It is that time of the year again. The Union Budget 2013 is just around the corner. And everyone is busy making a wish list. A wish list of what they want or are hoping that the Finance Minister would do. As per the Economic Times, investors too have a wish list. A list of things they want which they feel will give the investments in the capital markets a boost during the year.

Let us take a look at what this list contains. The foremost demand that the investor community has is to make investing in stock markets more appealing. This means that the Finance Minister should look at making extensive changes in the regulations that governs the capital markets. This will hopefully boost the functioning of the markets by improving the governance standards. There is also a need to restructure the government's Rajiv Gandhi Equity Savings Scheme (RGESS). Investors want this to be made more attractive by increasing the tax benefits and expanding its scope. Currently the scheme is being offered only to the first time investors and gives a rebate of up to Rs 25,000 to the investors. Tax benefits on mutual funds and cutting down the STT (securities transaction tax) could also help the domestic investors.

The most important thing that investors want the Finance Minister to consider is the points on boosting foreign investments in India. The FM has indicated recently that he wishes to concentrate on attracting foreign investments in the country. For this he may need to remove the cap on foreign investments in debt. Or to specify the limits as a percentage of the issue size.

Things like improving regulations and expanding the RGESS are something that would definitely help investors. Providing tax sops could also help in making investing in capital markets more attractive. Currently a large majority of investors in the country prefer to stash away their savings in deposit schemes or gold. If markets are made more attractive through tax benefits then a large part of this money could be channeled into them. But we wonder of the FM would give too many benefits on this front. The fiscal deficit makes it unviable for him to try and cut down on the tax revenues by too large an amount. Also, with regard to attracting more foreign capital into the capital markets, the government needs to be cautious. Foreign investors can help boost asset prices. But they can leave just as quickly as they come in. History has several reminders of the sharp losses suffered by everyone whenever these investors have fled. So it is necessary to be cautious when amending the rules on this front.

What is your wish list for the Union Budget 2013? Share your comments or post them on our Facebook page / Google+ page

01:08  Chart of the day
Indians may predominantly be tea drinkers. But they rank pretty high when it comes to the production of coffee too. The country exports a large part of coffee produced. For the year 2012, India ranked 6th in the world in terms of coffee exports by exporting 5.3 m bags of coffee during the year. But despite ranking 6th, overall exports of coffee in 2012 did decline for India on a year on year basis. Unfortunately, 2013 may not be steamy either. This is because of the decline in demand from the crisis stricken Europe. Things were also worsened by pest attacks which damaged a large part of the crop.

Source: Financial Express

It has often been reiterated that when measuring inflation in India, taking the consumer price index (CPI) makes more sense than the wholesale price index (WPI). This is because the latter does not take into account the prices of food. And higher food prices have been the main reason why consumer price inflation has not really come down even when the WPI has. Thus, does it make sense for the Reserve Bank of India (RBI) to lower interest rates when CPI is still firm? Lowering interest rates would mean that household savings would take a hit. Further, higher food prices eat into the incomes, as a result of which the propensity to spend on non-food items is low. Further, higher fuel prices also have an impact because it adds on to the transportation costs which ultimately reflect in food prices. One of the things that the government needs to do is reduce supply bottlenecks and provide adequate storage facilities. This is so that there is no wastage of foodgrains. This means that adequate supply will ensure that prices stay lower. The mechanism of minimum support prices also needs to be looked into especially when it is not aligned to the market but ends up impacting the market prices instead. Overall, the government cannot base its policies entirely on WPI but needs to attach more importance to the consumer price inflation numbers.

Myopic and misguided policy making. There are not a few but several instances when these have thwarted India's economic prospects. But surely the government has failed to take any learning. The recently duality in imposing customs duty on coal by Customs officials and Finance Ministry being a case in point. Indian customs authorities have started denying coal importers a duty concession. To put things in perspective, power producers who import coal are entitled to a concessional duty of 1% until March 2014. The Customs department, on the other hand, has started denying the concession. The reason being that steam and not bituminous coal is entitled to the sop. Worth noting that the latter attracts duty of 55%. Now there could be some differences of opinion on the sop eligibility. But the very proposal to offer tax sop was to ease the burden on power producers who are reeling under coal shortage. With domestic coal supplies being inadequate, steep cost of imported coal could be the final nail in the coffin. It is time the government takes serious note of the sector's critical health.

What do you think is a major difference between a natural science like say Physics and the social science of economics or for that matter, the financial markets? Well, in Physics, what the participants think have no influence on the end result. In other words, if a cube of ice melts at certain temperature, no amount of thinking on your part would change this fact of life. But what about financial markets? In these markets, what the participants think does in fact alter the end result. If all the participants think that a particular stock should go higher then it certainly would. Simply because the buying action of all the buyers would push the stock into higher orbits. This would then lead to a vicious circle where higher prices would attract more buyers which in turn would push the prices still higher.

This is exactly what an article in livemint is trying to highlight. It observes how high levels of corporate investments are followed by lower stock returns. Well, we see the same principle that we highlighted above at work here. Initially when investment activity picks up, it improves profits. But soon all the companies start investing, hoping that their profits would also improve. This cycle continues until it is no longer sustainable and then the correction period ensues which corrects the excesses of the past. The Indian economy seems to be going through the exact same correction we believe and once sentiments improve, investment activity should start picking up. However, the only way to not get sucked into these alternate cycles of optimism and pessimism is to have a rational approach we believe. There is no point in waiting for the peak period to sell and awaiting rock bottom prices to buy. For these are never known beforehand. Just ensure that you pay a price that has a good margin of safety built in it.

The precious metal had another solid year in 2012. In value terms, gold demand in 2012 was US$ 236.4 bn, an all-time high. However, the price of gold hasn't glimmered too much lately. Gold has lost more than 10% off its October 2012 high and is likely to decline further. As a result, billionaire investors George Soros and Louis Moore Bacon cut their stakes in exchange-traded products backed by gold last quarter as futures dropped the most in more than eight years. However this isn't the first time Mr. Soros backed away from gold only to return a few quarters later. Mr. Soros had dubbed gold "the ultimate asset bubble" early in 2011. He had cut back his gold holdings and kept his stake low through the first three quarters of that year. Signs of a global economic recovery have also put investors in a brighter mood, easing long-running concerns and leading them away from safe-haven assets such as precious metals.

In the meanwhile after opening the day on a positive note, Indian equity markets continued to trade in the positive territory. At the time of writing, the Sensex was up by 54 points (0.3%). Among other Asian stock markets, Hong Kong, Indonesia and Korea closed the day in the red. However the other major markets have closed the day on a positive note.

04:55  Today's investing mantra
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    Equitymaster requests your view! Post a comment on "Wish list for Budget 2013". Click here!

    12 Responses to "Wish list for Budget 2013"

    Anup K Nair

    Feb 23, 2013

    The last budget from this Government will be a landmark budget. Just as we all remember 1991 landmark Manmohan Budget and the freeing of the economy; so shall we remember 2013 budget...HISTORY always repeats its cycles in 13, 15 17 year cycles...


    Mira Shah

    Feb 22, 2013

    Encourage cashless and electronic transactions, particularly with non-orgnized labor.
    Make Aadhar compulsory for KYC and mobile phone users.
    Allow municipalities to give tax exemption for donation of urban furniture.


    j chandrasekaran

    Feb 21, 2013

    It is time that the poor needed to be attended to.Talking too much about the equity,debt,FII,FDI,tax sops for investors need to take a back stage.The FM should concentrate on bringing down the food inflation, employment to the unemployed and underemployed,health and education.The need of the hour is to attack the parallel economy. Demonetization of high value currency and consumption tax on the rich and ultra rich.These efforts will bring in distribution of wealth and well being of the nation as a whole.

    Like (1)

    Deepak T

    Feb 21, 2013

    1. If there is extra tax on super-rich, then a rational definition of super-rich. A person earning 40 lakhs per annum will have less retirement savings in his entire career than tax paid by Kareen Kapoor in one year. Clubbing them together is asinine.
    2. Do away with MF commissions. Most of the investors do not use the agents anyway. This commission leads to mis-selling of MFs which is going to take away the investors in the long run. Again, why should investors pay for something which is benefitting the AMCs?
    3. A tax structure which targets high end, luxury goods consumption. Politicians, businessmen, big-farmers, agents roam around in SUVs/luxury cars, live in palatial farmhouses and collect memberships of elite clubs, and pay zero/less tax by belonging to the powerful class or charging all these as expenses to their businesses. Not fair.
    4. Reduction in government expenses. This should start with less freebies for politicians. I think they can definitely live without the airfares, VIP choppers, paid vacations, iPads, laptops, cars, bungalows etc. Same goes for the babus.

    Some way to introduce fairness in treatment of ordinary citizen vs people in power is a must. Most of the unrest these days is borne because of frustration. An Indian society in which NOBODY is honest chafes at corruption because it feels that powerful are getting away with everything.

    Like (1)


    Feb 19, 2013

    The incentive for small savings has not been revised for the last so many years. This will boost the level of investible funds and infrastructure can be improved, which in turn increase the employment opportunities and......

    Like (2)


    Feb 19, 2013

    I don't care whether the fiscal deficit and current account deficit is more or less but keep printing money and distribute them evenly to all classes and the minimum wage of the women workers should be Rs 25/hr and men should be Rs 40/hr as a policy decision to keep pace with the inflation.

    Like (1)

    sundaravaradan S

    Feb 18, 2013

    1.Make rules in such-a-way that DII Vs. Fii is 7:3, over a period of time. (PF, LIC, MF, RGESS etc are made most attractive! (The Social Security fund, 401-K are examples)).

    2.Reduce Fiscal Defecit.

    3. Give incentive to Food-Supply,Storage, Processing Industries.
    4. Give time-bound clearance of Infrastructure Industries.
    5.Implement GST, quickly.

    Like (1)


    Feb 18, 2013

    As per increasing inflation and dearer standard of living in India these few crucial revisions are must for a mango man like revision in net disposable income, tax deduction under 80D for medical utility for whole family, house rent allowance, children education expenses deductions etc. its not not we Indians requires to increase our wallet size but is hardcore requirement to survival, what about investment which remain part of planning on paper only as first and individual should be given right to earn (without any cut) for his endurance.

    Like (1)


    Feb 18, 2013

    FM should set up a NAAC under PPP - National Agency for Anti-Corruption Actions. The agency should have powers to recover the loss - courts can continue to punish the guilty as at present. NAACA's shares should be floated on NSE. The way UPA is entering corrupt deals, NAACA shares will be a blockbuster. It's share price will also signal to Foreign investors.

    Like (1)


    Feb 18, 2013

    I wish the Finance Minister raise the IT limit from the existing level lof 2.00 lacs to 2.5 lacs in view of the cost of liviing.

    He shlould explore ways to amend the Grautity Act whereby employees working in public and private sector entitle to get 20 days salary for every completed year of service as against 15 days as at present. This will lessen the burden of the employee so far as his needs for housing and health are concerned.

    Like (1)
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