Without getting into a debate on whether the Interim Budget was a ‘Statement of Economic Intent’ or an ‘Announcement with Electoral Intent’, let us focus instead on how it and the newfound dovish stance of the RBI could impact investments across traditional asset classes.
To start with, there is a proposed rebate on gross total income up to Rs 5 lakh (not above), hike in Standard Deduction for the salaried persons from Rs 40,000 to Rs 50,000, and a hike in TDS threshold on interest on bank and post office deposits from Rs 10,000 to Rs 40,000. Will these announcements boost investments in equities?
Methinks not, the rebate up to Rs 5 lakh income has limited benefit from an investment angle as the remaining income tax slabs stand unchanged. The uptick in Standard Deduction, which itself was in lieu of medical and travel allowances and hence more or less neutralised last year, is again marginal and unlikely to motivate small investors to rush to invest it. Finally, regarding the increase in TDS limit on deposits, while it is certainly convenient, especially for senior citizens, it does not reduce one’s tax liability and enhance savings. So, that too is unlikely to translate into fresh investment. To conclude, equities should fare as well or as badly as they would have, notwithstanding the Budget. However, the dovish RBI policy could provide at least a near-term boost to this asset class, though its longer term impact will largely depend on whether the flagging credit offtake improves.
Again, the proposed removal of taxation on notional rent on a second home and the extension of the benefit of Section 54 of the Income Tax Act to two properties up to a maximum value of Rs 2 crore is convenient and will probably help in family settlements, but will it really boost the realty segment?
Unlikely, as realty is not an asset class of choice right now. This is primarily because supply far exceeds demand in most geographies and the quantum of unsold inventories piling up suggests that notwithstanding the tax sops on offer, the prospects of deriving any significant returns from an investment in this asset class are limited. Even the likelihood of a lower borrowing rate post the RBI’s change in stance may not be adequate incentive.
There is nothing in the Interim Budget that might significantly enhance investments in the debt asset class too, though the extension of the TDS limit on bank deposits and post office savings might actually attract some additional inflows, purely based on its convenience. However, the change in RBI’s outlook might affect fixed deposit investors adversely though it could boost inflows into certain categories of debt mutual funds.
In the commodity asset class space, it is usually the precious metal, gold, that occupies pride of place among non-hardcore commodity market investors. There is nothing in the Interim Budget or the RBI policy that does it any harm or good, and so it will continue the way it has — a hedge for better informed equity and consumption for the rest.
Ashok Kumar heads LKW-INDIA, a wealth management firm, and blogs at www.cricinvest.blogspot.com