Budget Impact - Dhirendra Kumar

Last year, I thought that Budget 2006 was a 'low-impact' one as far as issues like savings and tax relief on savings went. The basic shape of taxes, both personal and capital gains, remained the same. In Budget 2007, things are much the same. This is yet another low-impact budget whose underlying message for savings and investments is that things are basically OK and there's no need to tinker too much. As I thought last year too, there's nothing wrong with a budget that's basically a do-nothing in these areas. Historically, Indian Finance Ministers have shown a tendency to do too much of the wrong things when governments are in some political pressure but Mr Chidambaram has stuck to his guns and basically emphasised that his policy on savings is just fine and I think that's a good thing. For individuals doing their tax-planning, stability of the tax regime has a great value.

Exemption: However, there are a few changes that will impact some segments. The increase in the basic tax exemption by Rs 10,000 means an extra Rs 1,000 a year for all tax payers. This kind of an increase should really be automatic and linked to some sort of an inflation index.

Dividend Distribution Tax: Some of the mutual fund industries' debt fund products will come under increased pressure as the Dividend Distribution Tax in liquid and money market funds has been hiked to 25 per cent. These are the kind of funds that most corporates use to park short-term cash. Of course, banks will benefit because their deposits will not be as relatively unattractive as they are now compared to income funds, but on the whole this will definitely mean a higher tax outgo (even though this tax outgo is invisible in their accounts) for cash-rich companies. It's difficult to calculate the exact impact at this stage but it is entirely possible that fund companies that have been hyperactive in these kinds of products could be severely affected.

New Regulations: In his speech, the FM said the government sought to 'promote the flow of investment to the infrastructure sector by permitting mutual funds to launch and operate dedicated infrastructure funds.' I'm not sure yet what this means. Funds are already free to launch any kind of sector-specific funds and some infrastructure funds already exist. Another point about funds he made is that the government would 'converge the different regulations that allow individuals and Indian mutual funds to invest in overseas securities by permitting individuals to invest through Indian mutual funds'. Here again, individuals can already invest abroad through mutual funds. I guess things will become clearer when the actual regulations detailing these changes arrive.

Exchangeable Bonds: Another interesting statement is that the government will 'put in place an enabling mechanism to permit Indian companies to unlock a part of their holdings in group companies for meeting their financing requirements by issue of Exchangeable Bonds'. In countries where they are permitted, exchangeable bonds are bonds that can be exchanged for the stock of a company other than the issuer, generally a subsidiary. I guess this would be mostly of interest to business houses that like to use innovative financing and restructuring strategies.

Markets' Fall: As far as stocks' steep fall on budget day goes, I think investors were basically nervous and were looking for any excuse (the budget or the global stock collapse over the last two days) to sell heavily. The general story seems to be that the market expected this or that benefit and since nothing materialised prices are crashing. It seems that whether it is corporate results or the Union Budget, stock players routinely build up great expectations unilaterally and then complain when these are not met.