This is what the upcoming Budget needs to address... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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This is what the upcoming Budget needs to address... 

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In this issue:
» What does a deficient rainfall in June signify
» REITs to see the light of day?
» Inflation in the US is already very high
» There is no incentive to work in the US
» ...and more!


00:00
 
With the Modi government having come into power, July 10 is the next date that everyone is interested in because that is the day when the Finance Minister Mr Arun Jaitley will announce the first Budget of the government.

In the days leading to the general elections and post the results as well, markets have rallied considerably. A lot of hopes have been pinned on the new government to deliver on a wide range of issues which its predecessor could not. And the first Budget in that sense is important because it will give a flavour of the government's agenda and its focus on reforms.

Naturally, in the days leading to the Budget, investors, corporates, households and various other parties will all have their own wishlists. And while now everyone's wishes will be granted, here are a few that need to be urgently addressed:

Tackling inflation: Inflation continues to remain a persistent headache for the Indian economy and the primary reason for this has been the surge in food prices. So it is obvious that this is an area that needs to be seriously looked at. So far, the Modi government has chosen to rely on short term measures to prevent the hoarding of vegetables particularly onions and has also raised duties to discourage exports. But as the RBI has also time and again pointed out, the focus needs to be on addressing supply side bottlenecks and announcing and implementing measures that will result in adequate and proper warehouse facilities for foodgrains.

Tax reform: This is another area where reforms are long overdue. Currently, the tax structure in India is quite cumbersome. So the focus should be on simplifying these laws. The UPA government had chosen to apply tax reforms retroactively and this in many ways proved to be its undoing because companies lost confidence in doing business in the country. For the BJP government this will be a real challenge especially since it has clearly stated its intention of reviving the business climate in the country. A roadmap to implement the goods and services tax is also something that will be closely watched.

Infrastructural revival: Fostering development and ramping up infrastructure was the ticket on which the Modi government rode on. Thus, this will be a critical area where the government will need to seriously deliver. Essentially, a lot of key projects had been stalled during the reign of the previous government and these need to be revived.

Job creation: India's plus point is its demographic dividend which means that it has a larger proportion of younger population as compared to many of its developed peers. However, there need to be jobs available that will enable these younger people to enter the workforce. More importantly, the skills sets that this young workforce acquires have to align with the requirements of industry.

Spending judiciously: This is going to be another major challenge for the Modi government. India's fiscal and current account deficit had deteriorated during the tenure of the UPA government. While there was improvement in the current account deficit numbers recently, most of it was due to short term measures such as placing import duties on gold. Ideally as far as the fiscal deficit is concerned, the focus will have to be on bolstering revenues and cutting down on non-developmental expenditure such as subsidies. But that could be easier said than done.

The recent move to defer decision on the gas pricing issue and the roll back of railway fee hikes point that the new government is also vulnerable to populist measures. That is why the focus has especially sharpened on the upcoming Budget because it will give a feel of whether the Modi government has the political will to take some tough decisions. As Ajit Dayal recently wrote in the Honest Truth, the Union Budget will need to have the all right ingredients to usher in economic boom in the true sense.

What is your wishlist for the Union Budget 2014-15? Let us know in the Equitymaster Club or share your comments below.

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01:36  Chart of the day
 
A way to predict future outcomes is by looking into the past. Although, this may not hold true for all cases, it can be helpful in gauging investment trends, or company financial performances. However, as you would be thinking, the final outcome would vary a lot.

Going by today's Chart of the Day - sourced from firstpost.com - data from 1901 shows that in the past 113 years, India had less than 30% rainfall (than the average) in the month of June only 11 times. It may be noted that in the month gone by i.e. June 2014, the country received 40% less rainfall than the normal average of the month. And therefore such a study has been done. While the IMD expects a revival in monsoons in the month of July, how things will actually pan out in the remaining monsoons season is anyone's guess. While a lot is riding on the rain gods to provide a sort of fillip to the Indian economy, predicting the outcome is a challenge and nearly impossible. What investors could do instead is to prepare themselves for a negative monsoons outcome as going by the data, the possibility of above average rainfall seems less in the current year. Having said that, one should not worry about the stocks they have as part of their portfolios as long as the companies are well managed and have strong future prospects.

The June months which have seen deficient rainfall


02:11
 
Reforms have been the priority of this new government. And real estate sector is expected to be one of the beneficiaries of the reformist approach of the Modi government. It appears that Real Estate Investment Trusts (REITs) will finally see the light of the day in India. The taxation issue which was hindering the launch of REITs is likely to be addressed by the new government in this year's budget.

The benefits of REITs are multifold. Since they trade on exchanges, REITs provide an exit option to companies who have a huge portfolio of property holdings. On the other hand, they provide a real estate exposure to small investors who cannot afford to invest in real estate because of large ticket size. Further, as REITs trade like shares on exchanges they also provide liquidity.

If one wants an exposure to real estate, there is a benefit of buying REITs over buying shares of a real estate developer. The advantage is that REITs provide diversification benefit. By investing in a share of a real estate company, you are exposed to operational risk of that company. However, since REITs invest in multiple properties this risk gets diversified. Thus, listing REITs will provide investors access to a diversified real estate portfolio of holdings. And this comes at a fraction of capital investment. As such, listing of REITs is a welcome step.

02:55
 
The Coal and Power ministry has for the time being shelved plans to break up Coal India into smaller units. However, it is keen to bring in private investment into the coal mining sector. And for that, it has proposed that Coal India (CIL) will be the nodal agency for coal mining PPPs. The PPPS are public private partnerships that will invest in coal mining projects of CIL. Through the PPPs, CIL aims to add about 60-70 million tonnes of capacity per annum in the next five years. So far, CIL has been using contract miners, with limited benefit due to the short term nature of the contracts. The PPPs could however be a game changer for the coal mining sector. The private sector tends to utilize capital assets and human resources with higher efficiency. And this may spillover to the PPPs. However, to ensure that private players become willing to invest in CIL, the government will have to put some strict output targets on the PSU.

03:26
 
The moment someone starts talking about macroeconomic predictions using certain graphs and equations, we believe we're better off looking the other way. Simply because macroeconomics is not something that can be reduced to few mechanical formulas and sophisticated curves. We therefore had our fair share of doubts about an inflation study conducted in the US recently. It argued that the 2% inflation target of the Fed could be breached if those out of work for long periods suddenly start finding employment opportunities. However, should these people stay unemployed then the inflation could also stay below 2%.

Well, we are of the view that this is a totally flawed way of looking at things. If one also takes into account inflation in prices of assets like stocks and real estate, then the inflation is already very high. And the longer the interest rates are kept low, the bigger this problem will become. However, it looks like none of the past lessons have been learnt. And therefore we won't be surprised if there is a bigger crisis than what we saw in 2007-08 on its way.

04:07
 
If one was to go by news reports then it would appear that the US economy is on the upswing. The US media seems to be unwilling to report any negative news about the economy. However, if you listen to noted economist and business professor Peter Morici, you would get a truer picture. According to him, these are not great times for the US economy. He is of the opinion that rising entitlements and handouts have reduced the incentive for people to go out and find work. With the marginal tax rate as high as 50%, many people do not want to increase their income. Many people in the US seem to be content living on part time incomes. What's more, they fear losing their benefits if they get a full time job!

We agree with professor Morici and would like to point out that the situation in the US is far worse than it appears. Welfare liabilities have increased hugely. According to some estimates, the total unfunded liabilities in the US may be higher than US$ 200 trillion. The time may not be far away when the US government struggles to pay the welfare bills when they come due.

04:45
 
The Indian stock markets have been trading strong. At the time of writing, the benchmark BSE-Sensex was up by 101 points (+0.4%). Majority of the sectoral indices were trading firm led by auto and metal. IT and pharma stocks were among the few stocks trading in the red. Asian stock markets were trading mixed with Japan and Taiwan being the biggest gainers. The European markets have opened the day on a strong note.

04:56  Today's investing mantra
"When stocks are attractive, you buy them. Sure, they can go lower. I've bought stocks at $12 that went to $2, but then they later went to $30. You just don't know when you can find the bottom" - Peter Lynch
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7 Responses to "This is what the upcoming Budget needs to address..."

Tikam Patni

Jul 6, 2014

Abolish personal income tax. Money spent in it's collection is perhaps more than money collected.

How many man hours the tax payers and their CA waste in trying to save this amount. Entire country is looked at with suspicion as "chors". Why??? After all tax is only a part of their legal earnings.

Like 

Tikam Patni

Jul 6, 2014

Modi has won election on one promise now called Modi Mantra: Minimum Government , Maximum Governance. In practice it means, loosening Governmental noose from the necks of citizens. For FM it means get IT dept off the back of taxpayers, or at least of honest tax payers. Be polite in oral and written communications. No witchhunt. So what if full tax as per them is not paid, after all tax is a part of a taxpayers's earnings . This outlook will truely demonstrate Modi Mantra in practice.

Like 

V.S.Patil

Jul 3, 2014

The Finance Minister while presenting the general budget should be sincere in his desire and efforts to improve the economic health of the country particularly of the people of lower strata and working class middle and lower middle levels. I being one of them, though have witnessed many budgets so far, but not felt any difference in the form of relief, relaxation that resulted in the increase in take-home pay and the ilk. My wish-list for budget is total exemption of the salaried class from income tax, withdrawal of cesse like service tax,Education tax, reduction in taxes on the items of mass consumption particularly the poor like Kerosene, Petrol etc. To compensate the loss in revenue by doing so, he may contemplate taxiing the super rich at a higher rate, tax the items which are luxurious in nature and are usually used by the rich of the society like luxury cars, foreign trips, liquor, tobacco products like cigarettes. Make vigorous and and sincere efforts in curbing generation of black money, bring back the money stashed in the Swiss Banks, prevent corruption in public dealings etc. In short the common man should feel relieved and be happy of seeing some positive vibes.

Like 

B D Gondekar

Jul 2, 2014

My Budget wish list:
1Tax exemption limit to increase to 3 lac
2 80cc limit to increase to 2 lac
So no tax up to 5 lac for Sr citizen

Like (1)

Sudhir Chandalia

Jul 2, 2014

In continuation to Ajit Dayals write up, the differntial income tax on dividend received by rich and welthy should be levied i.e. Dividend to be taxed @50% less DDT paid in the hands of persons falling in tax bracket of 50%

Like (1)

Basawaraj

Jul 1, 2014

At least during this year the income tax and various exemption limits should not be tinkered.Road map for the future taxes including indirect taxes should be drawn.Simplify the tax laws Govt should stipulate condition for the freebis.

Like (1)

K.Venkatasubbu

Jul 1, 2014

1. PSU Divestment Plan for fund mobilisation
2. Cuting down non - schedule expenditure
3. Substantial Allocation for Infrastructure development
4. Creating Warehouse Facilities
5. Personal ( Income Tax ) reforms

Like (1)
  
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