Long duration products continue to remain a prudent investment avenue

The first budget of the new government clearly lays down a framework for reviving the economy. The budget is seeking to address the structural issues like inflation and fiscal deficit. Increasing productivity across sectors, including in the government, seems the mantra.

The budget focuses on reducing the policy uncertainty – both with respect to fiscal deficit and with respect to taxation (especially retrospective tax). The aggressive attempt at reducing the fiscal deficit, particularly through targeted subsidies and reduced profligacy, is aimed at curbing the money velocity and unproductive expenditures. This reduces the structural inflation and allows the productive forces in the economy to borrow at more economical costs, thus pushing up the aggregate supply, as well as giving a start up to demand and investment cycle.

The government has slotted a capital expenditure of around 2.26 lakh crore (plan and non plan) for FY15, a growth of 18% yoy. Moreover, nearly Rs 2.47 lakh crore of PSU capital investment has been slated for the current year. These measures may provide a sufficient demand stimulus to kick start the investment cycle; provided the sanction and approval process is also expedited.

Likewise, the investment allowance of 15% on fresh investment (in excess of 25 cr) in plant and machinery is to act as a sweetener; and stimulate investment in the sector. Additionally, a 10 year tax holiday for such power companies, that has undertaken generation, distribution and transmission of power within next 3 years, would give a boost to our power sector, the backbone of our industry.

Thus, it is evident that growth through manufacturing and infrastructure is the key theme for this dispensation. This approach is due to the fact that these sectors also tend to be job intensive. Thus, if these measures go through, the investment led growth cycle may start to become evident by end of the year, and may become self-sustaining cycle.

This budget has sought to allay the fears of the domestic and the FII/FDI investors. Thus, the sentiments of the capital markets would now be dependent on the fact as to how these domestic and foreign investors lap up the given measures. More directly, the introduction of uniform and inter-useable KYC records will help expand the investors universe, and increase financial inclusion.

The government also seems firm in swiftly concluding the prolonged discussions on GST and DTC. We may expect some breakthrough by the end of this fiscal. On the other hand, the government is aiming at divestment to the tune of around Rs 60,000 cr. This exercise is over and above the possible divestment/dilution of the PSU bank holdings. Moreover, the budget has also increased the FDI ceiling limit in the insurance and the defence sector from 26% to 49%.

The budget has also enhanced the 80C taxation limit by Rs 50,000 to Rs 150,000. This increases the potential for household savings and may also increase the retail participation by way of ELSS. The budget has also increased the deduction on housing interest for self occupied property from Rs 150,000 to Rs 200,000. This should provide some relief to the average home buyer.

In conclusion, the government has clearly given an indication of a path towards high growth and consequent prosperity. This is a difficult path that would rely not on any free handouts but on increasing productivity. There are no more free lunches. Our hard work can make India what each of us desire and deserve.

Market Impact

• Policy and taxation clarity and stability may lead to increase in incremental FII and FDI inflows over a period of time.


• The government continues to maintain the borrowing levels of the FY15 interim budget at XX. While the larger market may have some concerns regarding the sustainability of the revenue and expenditure projections, yet we continue to believe that the projected deficit and borrowing levels would be maintained.


• The government has also displayed its keenness in managing food inflation through supply management and there has been some evidence of its effectiveness in the 1998-2004 period.


• Therefore we believe that that the interest rates in the economy may have a benign bias


• As a result, from the debt market perspective, the high carry and long duration products continue to remain a prudent investment avenue


• In a scenario of low borrowing, calibrated inflation and rising economy, the equities may outperform most of the asset classes. Thus, investment opportunities in the equities assets look attractive from 2-3 year perspective.

Mutual Fund Impact

• The increase in the 80C limit enhances the tax incentive for the potential retail investors to invest into the equities mutual fund.


• The increase in the long term capital gains tax (LTCG) rate from 10 to 20% and in tenure from 1 to 3 years (for the debt mutual funds) leads to the closure of tax arbitrage. This directs the mutual fund energies from the short term to more long term; and towards more stable investible inflows.


• The arbitrage available while calculating the dividend distribution tax has also been removed.


• The budget mentions about Uniform tax treatment for pension fund and mutual fund linked retirement plan. Though further clarity is awaited.