In the thick of the winter, hectic preparations are underway for Union Budget 2022-23. The North Block, where the finance ministry officials work overnight, will be secured over the next few weeks. Nothing can move in and out of the building before the Budget is presented. Many industry representations have already been made to the finance minister and the team. It is a Budget where everyone is looking for something.
For savers
If you are a saver, interest rates matter to you the most. They go up when the inflation in the economy creeps up. At the moment, it is creeping up. If you regularly put your money into fixed-income securities or fixed deposits of banks or government-sponsored schemes, you need to learn about the Budget’s impact on inflation. The government would encourage more supply of goods that are stoking inflation.
The Budget may cut import tariffs on specific items witnessing high demand and low supply. The other way the Budget would work on inflation is by managing government finances. If the government spends more and borrows more, that could stoke inflation in the economy, and rates could go up for savers. However, interest rates could stay put if the government exercises restraint and generates more tax and non-tax revenue. You need to balance your savings across asset classes to improve their returns. There is a good chance that the government would encourage long-term savings in the Budget.
For borrowers
If you are a borrower and have a floating rate applicable on loans, you are vulnerable to interest rates changing after the Union Budget. You may want to watch out for government incentives for home loan borrowers. The government would like to encourage more home buying to help revive the real estate sector.
Besides that, the government would want small businesses to borrow more and expand. They would need some solid incentives besides loan concessions to consider hiring more workers. You may want to keep an eye on Budget announcements related to interest subventions and concessions on the different types of loans that encourage spending at the level of businesses and households.
For investors
The government has already cut taxes in the previous budgets for corporates and individuals. The government’s effort appears to be to boost economic growth through investment rather than spending. It is more likely a pro-investment budget where the government would want to encourage businesses to trigger a cycle of economic activity. That is good news for the corporate sector that has already shown a strong upcycle in profits. Most pundits expect all significant sectors to perform over 12-18 months.
Stock markets and interest rates usually have an inverse relationship. Government finances are crucial in that context. If the government shows better control over the fiscal policy with a lower deficit, interest rates will stay low. That is good news for share prices. However, if the government lives beyond the means where expenditure is higher than the income, it is bad news for interest rates. That is because the government borrows more from the market, resulting in higher interest rates for other borrowers. Businesses need money at low-interest rates. For markets to continue to do better, companies need to keep costs low and generate a higher revenue over the next two years. According to most predictions, India is expected to grow the fastest among major economies over the next two years.
While the government will spend money on building the country’s infrastructure, there is no indication of leaving more money in your hands to boost consumption. In the past, the Union Budget was the most-watched out event to figure out things that could get cheaper or expensive. The government would make changes in indirect taxes like excise duty. Since all indirect taxes are merged into GST, the Budget no longer offers that excitement.
You may not want to expect any significant tax concessions from a personal taxation standpoint. There is a demand to rationalise the dividend and capital gains tax. However, the government has made it clear that there is no reason to offer tax concessions to any category of investors.
(The author is editor-in-chief at www.moneyminute.in)