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About the Author:
http://www.capitalmind.in
The man behind Capital Mind. Deepak is a co-founder at MarketVision, a financial knowledge company. Deepak also provides data research and consulting services, and now lives in Bangalore. Connect with him at deepakshenoy@gmail.com.

Trade Deficit for Jun 2014 at $11.7 bn, Highest in 11 months

No Comments » Written on July 16th, 2014 by
Categories: Macro

The trade deficit for Jun 2014 was at $11.7 billion, the most in 11 months (since Jul 2013).

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Imports at $38.2 billion were lower than the May number of $39.2 billion (but June had one less day, remember). Exports too, were lower at $26.5 billion versus $28 billion in May.

On an annual basis, imports have risen.

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This doesn’t augur well. Business Standard says that imports of gold in Jun 2014 were $3.12 billion, much more than Jun 2013’s $1.88 billion.

Import restrictions were set up in Jun-Aug 2013, first setting up curbs on imports, then removing all credit facilities for buying or importing gold and eventually raising duty to 10% on gold imports.

This ended up in rampant smuggling. As the rupee settled at 60, the RBI has been easing curbs, slowly, on gold imports. It seems that the demand, largely latent, has begun to show in gold imports in June.

Watch the trade deficit figure carefully. Capital Mind will keep presenting the data as it arrives.

RBI Goes Ballistic: Buys $22 Billion in May 2014 (Freemium)

No Comments » Written on July 16th, 2014 by
Categories: Premium, RBI

In May 2014, RBI went on the offensive against the rupee. Instead of disrupting the rupee market - where massive buys would create issues - the RBI bought forward contracts, worth $20.6 Billion, the largest single month purchase ever. In the spot market, the RBI bought about $1.7 billion. That took the month’s purchases to $22.3 billion.

(Source: RBI Bulletin)

For the RBI, this is the biggest single month purchase of the dollar, ever. And still, the dollar fell:


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RBI Allows Lower CRR/SLR for Infra Bonds, Eases Infra Lending After Budget

2 comments Written on July 15th, 2014 by
Categories: Budget2014, HomeLoans, RBI

The Finance Minister had announced in the Budget that there would be impetus for long term bank lending to private sector infrastructure projects by providing for contingencies. He also mentioned that bank funds collected to lend to infrastructure would have a relaxation on SLR or CRR.

This has immediately been addressed.

Infra Lending Stretched Over Longer Term

RBI has, in a notification, allowed new loans to infra project financing to be split in a 5:25 scheme - where the viability of the project may be long (say 25 years) and therefore, the amortization of the debt may take that much time. Since banks can’t think that long - they can’t do 25 year borrowing to finance this - they want to divide the project into smaller chunks - say 5 years - with the hope that after that term, there will be a “bullet” repayment of the loan by takeout financing by other banks.

The RBI has allowed this kind of lending to happen without calling the takeout financing as a restructuring proposal if the loan is “standard” i.e. it’s not an NPA.

This is also going to be allowed only for what is called infrastructure (there are about 29 industries) and “core” industries (coal, crude, natural gas, steel, fertilizers, petro-refining, cement, electricity)

There are caveats, like that banks need to somehow account for the fact that the loan will not be “taken out” and they’ll have to manage liquidity closer to the date.

This is potentially positive for infra lending, and applies only for new loans.

Infra and “Affordable” Housing

In another notification, RBI has made life better for banks.

  • Banks can issue 7 year (or more) bonds to lend to either infrastructure sectors (defined here) or to affordable housing.
  • Affordable housing means loans under Rs. 50 lakh to individuals (house values limited to Rs. 65 lakh) in the big cities , and Rs. 40 lakh (values limited to Rs. 50 lakh) in other places.
  • Banks can’t cross-hold these bonds between each other
  • No call or put options on the bonds.

These bonds will get a specific exemption from calculation of CRR and SLR. The way that works is that the amount under these bonds are reduced from Net Demand and Time Liabilities (NDTL) calculations of the bank, which feeds into the SLR and CRR calculation.

For more details on how this works, read our detailed primer on CRR and SLR.

There is a complex formula for how much will be available for reduction. It’s not like banks can take bonds and not have SLR or CRR and use it for whatever they want. The reduction in NDTL will be restricted by the actual amount of infra or affordable housing lending they do.

Upper Limit of Reduction: The circular even tries to encourage new lending by allowing only 16% of all current lending to be allowable for CRR/SLR reduction till March 2015. “Current lending” means loans to infra or the affordable housing sector as of today, the date of the circular. Further:

  • for 2015-16: Only 30% of current lending to infra/affordable housing qualifies for CRR/SLR reduction
  • 2016-17: Only 44% of current such lending qualifies
  • 2017-18: Only 58% qualifies
  • 2018-19: Only 72% qualifies
  • 2019-20: 86% qualifies
  • 2020 onwards - the full amount actually lent to such areas qualifies.

Priority Sector Lending limits too apply as a percentage of total bank credit, net of a few things. Even that credit number is reduced by this above formula, so that the percentage remains the same, but it’s of a smaller amount.

However, nothing that becomes an NPA will qualify for reduction.

Impact: this is very good for banks in the longer term, and we can expect these bond issuances to come around soon. The question, though, is if there is appetite for a lot of these seven year bonds, and if banks will actually find the lower SLR/CRR attractive enough to raise the interest rate they offer on these bonds.

Housing Bubble Impact: 65 lakhs for metros isn’t really “affordable”, and neither is 50 lakh in other places. So it’s going to be middle class speculation frenzy on these houses. You can expect prices to start inching their way towards these limits in smaller towns. (Exception: in Mumbai and Delhi, you get nothing for these prices.)

I don’t know why RBI wants to put housing into this limit. Infrastructure was bad enough, but housing? We are simply NOT going to learn. The west nearly died because of their housing bubbles, and we are doomed to go down the same way. Sure, not right now, but this is just setting it up for the (near) future.

Is Infy Topping Out in Earnings? Results in Charts.

2 comments Written on July 15th, 2014 by
Categories: Infosys

We’re a few days late, but here’s Infy results in charts:

Revenue Growth Interesting YoY, Flat QoQ

They’ve grown revenues about 13% over the last year, but it’s been flat QoQ

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Remember that the USDINR equation went above Rs. 60 in Sep 2013, which would have helped their rupee earnings. The rupee has fallen about 12% from last year, and their revenues are up 13%, so that’s about that.

Earnings, on a trailing 12 month basis, have grown 17% after a period of being very flat.

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Headcount Growth is a concern

Infy’s trying to hire like crazy, but they’re losing people like crazy too. Their profits are coming in from higher utilization:

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Net additions are only 879 people in the June quarter, even though they hired more than 11,500 people! Meaning - the difference is the number that left the company.

Stock Performance

The stock is up about 25% from the lows of August 2013, but has been steadily falling since March. While the last month was good (a move from the 2900 levels back up to 3200) the stock remains a little shaky with support at the 50 day moving average (3167).

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The next move will happen after Sikka takes over and the direction of the company changes. What’s really scary is that their employee count isn’t moving much, and they’re losing more people each quarter.

Disclosure: No positions.

US Funds Will Pay 15% Cap Gains Taxes in India

1 Comment » Written on July 15th, 2014 by
Categories: Budget2014

One interesting move in the Budget is to classify gains of foreign portfolio investors (FPIs) as capital gains. Foreign investors that buy and sell stocks or derivatives are in the business of doing so, and some income tax rulings have concluded that their income, thus, is business income.

Business income is taxable in India only if the business is located in India. Investors therefore did not want any office in India, including of their managers or otherwise.

This budget has now cleared the confusion and classified all such gains as capital gains. This means the managers can be located in India and be on the ground, without the fear that they will get taxed heavily.

The unintended consequence will be for investors coming from locations that don’t exempt capital gains (Mauritius and Singapore exempt it, the US doesn’t). Such investors will have to pay tax in India on capital gains.

The extra tax won’t hurt the fund much. A US Fund will pay capital gains taxes in the US also, and if it paid such a tax in India, it can claim credit for that tax. What it does, though, is to increase India’s share of that tax to 15% from zero.

According to Business Standard, more than 556,000 cr. is currently invested in India by US based investors.

Impact: Nothing will change for funds, but since they can set up operations in India, we might see some action in terms of hiring people on the ground and in investment in market research. The government will see more revenue.

Consumer Price Inflation for Jun 2014 at Three Year Low of 7.31%

1 Comment » Written on July 15th, 2014 by
Categories: Inflation

Consumer Price Inflation gives us something to cheer about, while we shop for carrots at Rs. 75 a kg in Bangalore. CPI Inflation was at 7.31%, the lowest annual number since this index was released, and lower than last month’s 8.28%.

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If things don’t get worse, the slope of the inflation line was steeper from June 2013 onwards, so the lower base will make inflation look lower.

WPI Inflation had come down too, to 5.43% in June. So it’s like an across the board thing.

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Component wise, we see the biggest decrease was in Food, which fell to 8%. Everything else, too, has moderated, except for Transport and Household Items, both of which are below 7% inflation.

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Both Urban and Rural measures are now showing a slide down.

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This looks very positive, and it’s not just that food prices went down. The rest went down too, which you might consider more “core”.

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Impact: Interest rates, obviously. The feeling is that they will come down. There’s an RBI meet on August 1. But also obviously prices of food have spiked in July due to a horrible monsoon, and veggie prices just went through the roof. This can spoil the party, and cause the RBI to wait.

If that’s fixed, we will see rates begin a downward cycle.

No Easy Choices for AMCs as They Stop Issuing FMPs

3 comments Written on July 14th, 2014 by
Categories: Budget2014, MutualFunds

There are no easy choices for Mutual Fund Asset Management Companies. After Budget 2014 raised the tax on debt mutual funds, they have pulled out Fixed Maturity Plans from the market, even returning money collected to investors (before the fund would have actually launched).

FMPs have more than 160,000 cr. invested - most of which will mature in a year. That money will not come back to new FMPs - and assuming a 9% return and an average of 20% tax, the tax collections will be more than Rs. 2800 cr. That’s the stake on the table now.

Some AMCs want SEBI to fight for them. Yet others want SEBI to let them make the FMPs open-ended so that investors get to stick around for 36 months.

FMPs can be moved to open-ended, but there are high operational costs. They’ll have to change the mandate, get investor approval (90% must approve) and then, offer automatic exits to those that didn’t want it.

These costs will have to be born by the AMC. SEBI will probably tell them that, and might not easily approve the large changes in mandate. (FMPs lock in the yield in an early transaction. An open ended fund will need a more flexible mandate)

Will the Finance Ministry Help?

No. They’ve decided that the loophole has to be closed, and FMPs of less than three years must involve paying short term capital gains tax.

In effect they’re telling us “long term is three years or more”. If this is the signal to debt markets this time, it is likely they do this to equity markets next year.

I don’t disagree entirely. One year is too short a term perhaps. And we can expect this three-year rule to hit equity markets soon.

In that context, no one should refuse the FMP investors a choice to stick around for two more years. If three years is what’s needed to get your gains tax free, then a stretch to three years isn’t a bad idea.

Lesson Learnt: Don’t Depend on Tax Arb

While I have been guilty of recommending this tax arbitrage, it was legal and visible. It’s taught me this again: don’t rely on tax rules for your longer term investments. (Or, apparently, even your shorter term investments)

To me, an FMP was an anomaly. You buy a bank deposit for one year, you pay tax on the interest. But you buy a mutual fund that buys the same bank deposit, it pays no tax, and then,by virtue of the magic tax arb, you also pay no tax. I suppose the taxman thought of it that way as well.

What I would like, though, is for them to think of real estate in the same way. If I own five houses, why should I pay no tax on selling one at a profit, if all I did was to buy another house? That’s blatantly unfair, and deserves to be removed as well. In terms of relatively unfair laws, the mutual fund one was benign compared to the massive arb in real estate. They need to remove that as well, and I wouldn’t be half as sad.

(And if you’ve bought a house for the tax arb, please note: the tax freedom is likely to go away)

If you asked me, I would recommend one thing:

  • Let this new tax rule apply only to investments made after the Budget day. This is the spirit of non-retrospective taxation. I hope FinMin listens.

Wholesale Price Inflation for Jun 2014 falls to 5.43%, But the Monsoon Can Hurt

No Comments » Written on July 14th, 2014 by
Categories: Inflation

Wholesale Price Inflation for June 2014 came in at 5.43%, lower than the May’s 6.01%.  However, April’s low number of 5.2% was revised up to 5.55%.

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Component-wise, primary articles (mostly food) has reduced to 6.84%. Fuel inflation remains high (due to diesel price hikes).

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The interesting thing is that Manufactured Goods (which is 65% of the index) is going up and even though it’s at only 3.75%, the index is going up.

This number is low, but obviously the monsoon can change everything. We’re still 43% deficient.

Budget 2014 Analysis: Deficit Skepticism Is Justified, Big Targets for 8 months (Premium)

No Comments » Written on July 14th, 2014 by
Categories: Budget2014, Premium

Budget 2014-15 has, to markets at least, been a bit of a disappointment. However, that is more about mismatched expectations, rather than a botched budget. What the government’s doing, at least on paper, is to bring the fiscal deficit down to 4.1% of GDP by changing things here and there.


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Budget 2014 Eases Taxes Marginally

What you really want to know about the budget: How it affects your taxes. So here goes: Base Slab Upped by 50K to 250K Your income upto Rs. 250,000 is exempt. (Earlier, Rs. 200,000). If you’re above 60 years of age, the exempt limit is 300,000. Above that, in a progressive manner: 250K (or 300K) to 500K is 10% 500K …

Read more....

Budget 2014 Direct Tax Summary: Almost Like There Was No New Government

The Budget Highlights are here, in a quick summary. We’ll warn you: it’s almost like there was no new government. We’ve seen some minor changes. What you care about Your taxes go down because of an increase of the base slab of 250K versus 200K (another 50K for senior citizens) An increased 80C limit on investments upto Rs. 1.5 lakh …

Read more....

The Murder of the Debt Mutual Fund By Closing a Tax Loophole

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  Invested in an FMP? Bought a Liquid Fund And Stuck around for a Year? Bought Debt Funds for the “Inflation Indexation”? You’re going to hate Arun Jaitley.   Let’s start with the basics. You can invest in a fixed deposit with banks. Which pays you interest. The interest is added to your income, and taxed at the highest rate …

Read more....

Cheaper Kindles, Chappals and Soaps, Pay More for Radio Taxis and Coke

We have seen indirect taxes change with the Budget, and here are the key changes: Consumer Goods Soaps get cheaper as customs duty on input chemicals is cut (Helps the FMCG companies like Godrej Consumer Products, HUL, Jyothy Labs) Lower end TVs (19” LCD or less, or CRT) will get even cheaper as input customs duties are exempted. (Mirc Electronics …

Read more....

Go Healthy: Tobacco Duty Hike of Upto 72%, Coke and Pepsi Get a 5% Tax

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It’s going to cost you a lot more to light up. The excise duty on cigarettes is up 72% for cigarettes less than 65 mm, and 11% to 21% on other cigarettes. Chewing Tobacco and Gutkha see rates go up 60% to 70%. Pan masala too goes up. This should have hit ITC hard, but the stock didn’t hurt much, …

Read more....

You Can Buy Only One House To Offset Capital Gains: Budget 2014

You can only buy one residential house with the capital gains you make, says the Finance Ministry, in the Budget. If you have capital gains from selling a house, you can now invest in only one house in India to avoid capital gains (only the amount invested in the house is exempt). If you have capital gains from any source …

Read more....

Capital Gains Bond Investment Loophole Plugged: Only 50 Lakhs Allowed to Offset Gains

One more tax loophole in Capital Gains has been bridged. Now, you can only invest your long term capital gain in certain bonds (54EC, like NHAI bonds) upto Rs. 50 lakh. Earlier, if you sold a house in, say November, you had six months to buy these bonds. Every financial year, you could only buy Rs. 50 lakh worth of …

Read more....

The 80CCD Confusion: Do You Get Another 100,000 Deduction?

There are many conflicting views on the budget. A certain section - 80 CCD - has been amended, clarifying that it is available to private sector employees as well. This has been taken many to believe that private sector employees can get an additional Rs. 100,000 if they invest in the New Pension Scheme (NPS). This is incorrect. I believe …

Read more....

Scathing Review, Cursed MF: Capital Mind’s Budget Pieces Elsewhere

Two of our articles have been published in Qz and Outlook. Here is some link love: Outlook: “Strong Mandate, Weak Budget” - a scathing review of the budget and the market’s response to it. Arun Jaitley’s first budget sends mixed signals to financial markets, and one strong message: this is not a dream budget. The dream budget, if you heard …

Read more....

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Disclaimer

Nothing in this newsletter is financial advice and should not be construed as such. Please do not take trading decisions based solely on the matter above; if you do, it is entirely at your own risk without any liability to Capital Mind. This is educational or informational matter only, and is provided as an opinion.

Disclosure: The authors at Capital Mind have positions in the market and some of them may support or contradict the material given above, or may involve a direction derived from independent analysis.

CAPM Portfolio: Stop "Profits" Due To Midcap Carnage

No Comments » Written on July 14th, 2014 by
Categories: Premium


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Optionalysis: Budget Day Option Strategies

No Comments » Written on July 14th, 2014 by
Categories: Premium

Before the Budget madness, let’s take a quick look at option strategies. Strangely, implied volatility is VERY low, with the VIX at 18.18 (election time saw it go up to 40).


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CAPM Portfolio: Adding [Stock] and Praying for [Stock]

No Comments » Written on July 14th, 2014 by
Categories: Premium


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Scathing Review, Cursed MF: Capital Mind’s Budget Pieces Elsewhere

1 Comment » Written on July 13th, 2014 by
Categories: Budget2014

Two of our articles have been published in Qz and Outlook. Here is some link love:

Outlook: “Strong Mandate, Weak Budget” - a scathing review of the budget and the market’s response to it.

Arun Jaitley’s first budget sends mixed signals to financial markets, and one strong message: this is not a dream budget. The dream budget, if you heard the political campaign, was one in which taxes would be lower. They aren’t, by much. There’s a token increase in the tax slabs and exemption limits that was long overdue after years of heavy inflation.

The dream budget would not tax us retrospectively—instead, Jaitley has decided there will be a committee that decides if a retrospective tax should apply or not. The budget should have reduced our fiscal deficit—instead, it finds solace in targeting the exact number that the previous government had left behind. The dream budget should have reduced subsidies. They remain, and become bigger.

The budget speech itself saw the markets oscillate from the deep disappointment that there was nothing major to expect to an opt­imism that there would be, and finally a resi­g­nation that this government was ano­­ther one that would spend Rs 200 crore on a statue while allocating Rs 100 crore for a metro project in Lucknow.

QZ India: The budget just killed a massive, lucrative segment of India’s mutual fund industry (on the debt fund taxation)

The new budget is going to leave mutual fund and asset management companies fuming.

That’s because the majority of money in mutual funds is invested in debt-oriented schemes—short or long-term debt, issued by the government or by companies. These debt-focussed funds are a different asset class from equity funds, which invest in the stock markets, and hold nearly 60% of the assets under management in India’s mutual fund industry. The budget has effectively wiped out a tax loophole that makes these funds so attractive to investors.

The 80CCD Confusion: Do You Get Another 100,000 Deduction?

No Comments » Written on July 12th, 2014 by
Categories: Budget2014, TaxSaving

There are many conflicting views on the budget. A certain section - 80 CCD - has been amended, clarifying that it is available to private sector employees as well.

This has been taken many to believe that private sector employees can get an additional Rs. 100,000 if they invest in the New Pension Scheme (NPS). This is incorrect.

I believe that:

  • In fact NPS contributions by individuals will on get tax-free upto Rs. 100,000 (they don’t get the 150,000 increased limit)
  • The contribution by your employer upto 10% of your salary is exempt (regardless of whether you also contribute or not)
  • Your contribution (as in, not your company’s) is clubbed along with the other 80C deductions and has a total deductible amount of (now) Rs. 150,000 overall. I’ll explain.

In my view, what’s happened is:

  • Your personal NPS contributions are restricted to Rs. 100,000 in this budget.
  • Since 80C is now Rs. 150,000, you can fill that remaining 50K by other things (like ELSS, Home Loan Principal, insurance, etc.)

Now, the technical details.

The Original Section

The current section reads like this:

80CCD. (1) Where an assessee, being an individual employed by the Central Government or any other employer on or after the 1st day of January, 2004, or any other assessee, being an individual has in the previous year paid or deposited any amount in his account under a pension scheme notified or as may be notified by the Central Government, he shall, in accordance with, and subject to, the provisions of this section, be allowed a deduction in the computation of his total income, of the whole of the amount so paid or deposited as does not exceed,—

(a)  in the case of an employee, ten per cent of his salary in the previous year; and

(b)  in any other case, ten per cent of his gross total income in the previous year.]

(2) Where, in the case of an assessee referred to in sub-section (1), the Central Government or any other employer makes any contribution to his account referred to in that sub-section, the assessee shall be allowed a deduction in the computation of his total income, of the whole of the amount contributed by the Central Government or any other employer as does not exceed ten per cent of his salary in the previous year.

This, was already pretty clear. If you were a self employed or otherwise employed individual, the sub-section (1) allowed you to contribute money into the NPS. (which is the “notified pension scheme” mentioned above). The amount

This has to be read along with Section 80 CCE which says:

80CCE. The aggregate amount of deductions under section 80C, section 80CCC and  sub-section (1) of section 80CCD shall not, in any case, exceed one lakh rupees.

Meaning: Everything put together that YOU contribute (not your employer) is clubbed together, and gets an aggregate limit of Rs. 100,000.

How much of your NPS contribution was exempt?

  • Your actual NPS contribution upto 10% of base salary (plus DA) for employees, or 10% of gross income for the self-employed
  • Plus, any amount your employer invests (upto 10% of salary).

Meaning, if you earned Rs. 100,000 a month, and you contributed Rs. 10,000 to the NPS, and your employer contributed another Rs. 10,000, then:

  • Your Rs. 10,000 a month - or Rs. 120,000 a year qualifies, but because of 80CCE, only 100,000 is exempt (and you don’t get to deduct anything else from the 80C type of investments) 
  • Your employer’s contribution of Rs. 120,000 a year was exempt (and effectively, not counted as your income). This has no limits, but you have to show the 120K as income, and claim it as a deduction.

What’s Changed?

The finance bill changes the 80C, and 80CCE limit to Rs. 150,000. But it also changes the 80 CCD section like this:

28. In section 80CCD of the Income-tax Act, in sub-section (1), with effect from the 1st day of April, 2015,––
(i) for the words, figures and letters “Where an assessee, being an individual employed by the Central Government or any other employer on or after the 1st day of January, 2004”, the words, figures and letters “Where an assessee, being an individual employed by the Central Government on or after the 1st day of January, 2004 or, being an individual employed by any other employer”
shall be substituted;
(ii) after sub-section (1), the following sub-section shall be inserted, namely:––
(1A) The amount of deduction under sub-section (1) shall not exceed one hundred thousand rupees.”.

The first part basically clarifies that you can be employed anywhere. (In fact you can even be self employed, because the “or any other individual” continues to stay).

The second part is critical. It says that amount YOU contribute (which is what is subsection(1) is) is only deductible upto Rs. 100,000.

Clearly:

  • There is no ADDITIONAL investment deduction under 80CCD for your own contribution.
  • This deduction, remains locked for your own NPS contributions upto Rs. 100,000 only.
  • If you invest that, then you get another 50,000 deduction for investing other 80C type assets
  • If you don’t invest in NPS, you still get the 150,000 to invest in 80C type of assets

And NPS is Taxed on Exit

NPS contributions may be exempt, but they are one instrument where exits are taxed. Whatever money you received - whether as a lumpsum or a pension - is added to your income and taxed accordingly.

So in that context, a Provident Fund is better - since there is no taxation on exit. Hopefully a future finance minister won’t change that!

How You Can Still Benefit

You can tell your employer to put 10% of your salary into the NPS into your account, but you should only contribute the minimum (Rs. 12,000 per year). You can then use the rest of the 138,000 to do the other 80C investments - like PPF or ELSS funds or such.

The employer’s contribution is exempt and taxable only on exit. Then, you wait until some finance minister gets itchy and makes NPS exits tax free. Which will happen when some senior tax officials begin to retire (I would imagine around 2020). Then you can get out tax-free also.

This could have been done last year also - it’s not anything new in this budget. Until NPS exits are made exempt, they compare poorly with a PPF.

Capital Gains Bond Investment Loophole Plugged: Only 50 Lakhs Allowed to Offset Gains

3 comments Written on July 11th, 2014 by
Categories: Budget2014, CapitalGains

One more tax loophole in Capital Gains has been bridged. Now, you can only invest your long term capital gain in certain bonds (54EC, like NHAI bonds) upto Rs. 50 lakh.

Earlier, if you sold a house in, say November, you had six months to buy these bonds. Every financial year, you could only buy Rs. 50 lakh worth of such bonds. So you could buy Rs. 50 lakh worth bonds in March (five months later) and then another Rs. 50 lakh in April (six months later).

Since the financial year ends in March, you could claim an exemption of Rs. 50 lakh for two years, taking your exemption amount to Rs. 1 crore.

This has been strongly plugged.

Now, if you sell an asset this year, then the total investment in capital gains bonds, in this year and the next, put together, can only be Rs. 50 lakh.

My view: When I heard about the abuse, I almost started clapping slowly. There are no moral aspects to tax planning of course. They’ll just have to find other loopholes.

You Can Buy Only One House To Offset Capital Gains: Budget 2014

3 comments Written on July 11th, 2014 by
Categories: Budget2014, RealEstate

You can only buy one residential house with the capital gains you make, says the Finance Ministry, in the Budget.

If you have capital gains from selling a house, you can now invest in only one house in India to avoid capital gains (only the amount invested in the house is exempt).

If you have capital gains from any source (including bonds or such), you can again invest in the same “one house” restriction applies. What is exempt here is a part of the capital gain that is the proportion of the investment to the earlier sale consideration.

The deal, it seems, was that people were buying multiple houses to offset capital gains. If you sold a house with gains for Rs. 1 cr. and bought two houses worth Rs. 50 lakh each, you could have used the unclear language in the tax act to claim exemption on the full 1 cr.

Now, only one house can be purchased. If you have a truckload of capital gains, you’ve just got to buy one massive house. It can’t even be two houses next to each other (common in Mumbai and some parts of Delhi).

Secondly, you can’t buy a house outside India to claim the exemption. Apparently some people were doing this.

My view: I would of course have preferred if such gains could only be reinvested if it were your primary residence. And this offsetting ANY capital gains with a house purchase is just a silly thing; why not incentivize us similarly to buy stocks or ELSS funds? But my opinion apparently is not shared by the finance ministry.

This move won’t change things that much, but it does restrict such “rollovers” to one house per year for all such capital gains. 

Our Take on the Budget: What Just Happened?

5 comments Written on July 11th, 2014 by
Categories: Budget2014

There’s always things to like and dislike about budgets and governments. How could they do this? What about that? These are considerations, sometimes petty and sometimes facepalm material, and will keep media houses busy for ages. But let’s step back a bit.

What did Jaitley really do? He didn’t cut taxes. At Capital Mind, we didn’t expect him to. It’s better done in a full year budget, and this one will only last eight more months. He did give a small tax benefit by raising slabs, but what we really want is a better, less exemption heavy Direct Tax Code.

He didn’t really address the fiscal deficit. It’s big, they say. But a good portion of it is interest costs and subsidies. Subsidies aren’t changing right now. Nothing that we heard long ago - about how we can cut subsidies to zero, about how inefficients they are - have resulted in policy action. We only got a promise that they will fix things by a more focussed Food and Fuel subsidy. We must wait for these details.

He also promised to fix Food Inflation by reforming the FCI and the Public Distribution System. This is very tough in a good year (like 2013). In a drought year like 2014, will he be able to? We sure hope so, but hope is different from a budget. There are no budgeted costs for contingency, for what the reform will cost, or for a drought that will impact finances. (It’s not conjecture - the monsoon is 43% below normal right now).

The NREGA issue - of how come we “guarantee” employment by paying people for doing very little - has been addressed only by saying that the money will be spent but for “more productive, asset creating and linked to agriculture”. This needs a lot more clarity.

He tinkered with taxes. Much of this has to do with tax litigation. They moving of things around is to reduce the messy cases that are stuck in courts. There is also a lot more clarity on taxation, the due process and penalties. He’s also promised single-window-customs clearance, which should ease regulatory pain for importers. And better tax assessment, including advance rulings and defined committees for settlement. Will this be a game-changer or will it just become another hampering layer? We’ll hope for the former.

Jaitley’s allocations surprise us. Rs. 100 cr. for the Metro in Lucknow. For that to be useful, you will need a lot of luck, and now.  And then, they want to spend Rs. 500 in training elementary school teachers; but to set up Five IITs and Five IIMs the allocation is: Rs. 500 cr. Many large things have been given allocations like Rs. 100 cr. and it’s not apparent how any of this will be enough.

What the budget did do, was provide some clarity on the way forward. Easing the tax litigation process is good, and creating single window clearances for stuff is good. There is also a single government portal planned by December 31, where you’ll be able to get all the clearances you need to run a business, and pay fees online.They want to create a bankruptcy law for small companies which can shut down faster. They will create a shipping policy for inland and coastal shipping encouragement. The goal is to reduce friction in doing business, and these are good directional steps.

But at the same time there was no clarify on asset sales. They want to disinvest Rs. 43,000 cr. in the year, and then another 15,000 cr. from their ownership of non government companies. The last government managed to do only 40% of their targets last year, despite a roaring market after December. It’s not apparent how this government will do it, when they have just 8 months to go.

On the downside, while they want stable tax regimes, they’re reintroduced taxes on mutual funds held for a year, creating confusion in an industry that manages more than Rs. 700,000 cr. They have added more exemptions and tinkered with duty changes. These seem incongruent to the election promises that brought them to power.

There are a lot of built in promises, and while we should give the government the benefit of doubt, they definitely didn’t meet the high expectations we had. Maybe we expect too much of governments. It’s probably time they just stood still, so the rest of us can do greater things.

Go Healthy: Tobacco Duty Hike of Upto 72%, Coke and Pepsi Get a 5% Tax

3 comments Written on July 11th, 2014 by
Categories: Budget2014, ITC

It’s going to cost you a lot more to light up. The excise duty on cigarettes is up 72% for cigarettes less than 65 mm, and 11% to 21% on other cigarettes.

Chewing Tobacco and Gutkha see rates go up 60% to 70%. Pan masala too goes up.

This should have hit ITC hard, but the stock didn’t hurt much, actually closing up 0.4% at 344.

A smaller cigarette company, VST Industries, which makes the shorter Charms and Charminar brands, fell 16% on the news.

image

On another note, Aerated waters containing sugar will now pay a duty of 5%. This means your regular pepsi and coke consumption needs to be cut as well.

It’s not just the government finances they plan to make healthy. But Mr. Jaitley himself isn’t in the pink of it - he had to take a 5 minute break mid-way into his speech, and delivered the rest of it sitting down. Now if we had a tax on overweight politicians….

Cheaper Kindles, Chappals and Soaps, Pay More for Radio Taxis and Coke

5 comments Written on July 11th, 2014 by
Categories: Budget2014

We have seen indirect taxes change with the Budget, and here are the key changes:

Consumer Goods

  • Soaps get cheaper as customs duty on input chemicals is cut (Helps the FMCG companies like Godrej Consumer Products, HUL, Jyothy Labs)
  • Lower end TVs (19” LCD or less, or CRT) will get even cheaper as input customs duties are exempted. (Mirc Electronics perhaps?)
  • Footwear taxes reduced to 6% from 10/12% (Relaxo, Bata)
  • 5% more for the Coke and Pepsi types - sugared waters.
  • Increased duty of 11% to 72% on cigarettes. (Bad for ITC, VST Industries)
  • Excise on RO membranes for households cut to half.
  • Some telecom equipment duties go up, but we don’t know if this includes mobile phones.
  • A Kindle will cost lesser: Customs duty on E-Book readers cut to zero.
  • Input components for laptops and tablets will see no special additional duty.
  • Branded petrol sees a cut of duty from Rs. 7 to Rs. 2.35 per liter. (The more expensive petrols at stations will see a big price cut)

Energy: Solar

  • Lower 5% customs duty for machinery to setup a solar project
  • No customs duty for certain key inputs
  • Removal of excise duty for input items manufactured in India as well, to even the field
  • Also, 400 cr. spending on solar agricultural pump sets, 100 cr. for Solar parks on canals, and 500 cr. as a starting point for ultra mega power projects.
  • This is good for solar manufacturers and importers, but the question is whether the market is too far gone to be rescued.

Healthcare

  • Customs and Excise duty on HIV drugs and diagnostic kits is exempt.
  • Excise on DDT only manufactured by Hindustan Insecticides to give to Ministry of Health exempt. (Jeez, why? You might as well pay the tax, and declutter this section.)

 

Energy: Everything Else

  • Coal gets 2.5% +2% customs duty. Not sure why. We have a coal shortage. But apparently this is to “eliminate disputes”.
    • Exemptions for inputs into bio-gas plants and wind power. (Suzlon?)

Textiles

  • Lots of positives for the sector because of reduction in import duties, if the finished textiles are exported
  • PET bottle scrap that’s used to manufacture PSF of PFY will now pay excise duty of 2% to 6% (Earlier exempt)

Others

  • Service tax will be there for online advertisements. Print ads, though, remain exempt. (Strange)
  • Radio taxis to pay service tax. It’s not apparent if this will hurt taxi services like Ola, TaxiForSure or Uber, but it’s negative for them if it does.
  • Service tax on goods transported by ships will come down to about 5% from 6.2%.
  • Bring in Rs. 45,000 worth goods from abroad as baggage allowance ($750) instead of Rs. 35,000.
  • In a genius move, only duty free allowance for cigarettes is cut from the original 200 cigarette duty free allowance. Why genius? Because all cartons are 200 cigarettes (usually)!

The Murder of the Debt Mutual Fund By Closing a Tax Loophole

51 comments Written on July 10th, 2014 by
Categories: Budget2014, MutualFunds

 

Invested in an FMP?

Bought a Liquid Fund And Stuck around for a Year?

Bought Debt Funds for the “Inflation Indexation”?

You’re going to hate Arun Jaitley.

 

Let’s start with the basics. You can invest in a fixed deposit with banks. Which pays you interest. The interest is added to your income, and taxed at the highest rate you qualify in. So a 9% fixed deposit falls down to 6.3% if you are in the 30% bracket.

For companies, it was always going to be 30%.

But there was the Great Indian Debt Fund Tax arbitrage. If instead of buying a fixed deposit, you bought a debt mutual fund which bought bank wholesale deposits, a massive tax arbitrage worked in your favour.

If you held units for a year, then the gains were “Long Term Capital Gains”. These gains are taxed at lower rates of 10% of absolute gains, or 20% of “indexed” gains. When you index, you basically adjust your gains for inflation, and tax only what’s beyond the inflation impact.

The Example

So, if you put in Rs. 100,000 in a debt fund that returned 12% and you sold after a year, you got Rs. 112,000. Your tax used to be like this:

  • My 100,000 is adjusted up for (say) 9% inflation, so it’s now equivalent to 109,000.
  • The gain I made is only 112,000 minus 109,000 = Rs. 3,000.
  • The tax I pay is 20% of that = Rs. 600.

So for a gain of Rs. 12,000 I pay a tax of only Rs. 600 - effectively, a 5% tax!

The equivalent in a fixed deposit would have cost me, at the highest tax bracket, 30% of the interest of Rs. 12,000, or Rs. 3,600.

I pay 6x more tax with a fixed deposit!

The Result

High networth investors and corporates flocked to debt funds. There were liquid funds, income funds, gilt funds and other “debt oriented” funds. These, as of June 2014, manage over Rs. 700,000 crores.

image

(Link)

That’s a lot of money.

What’s Changed?

Finance Minister Arun Jaitley, in Budget 2014, has removed this tax arbitrage. Now, you must hold a debt fund for three years in order to claim long term capital gains taxes, otherwise the gains are “short term” in nature, don’t get the lower tax rates, are added to your income and don’t allow indexation.

Further, and thanks to Madhu for noticing this, the tax rate on long term gains used to be the lower of 20% (with indexation) or 10% (without indexation). The second part - of a lower 10% - is now gone.

From one year to three years, is a big change - a large amount of funds sit with mutual funds so that they get much lower taxes, but don’t have the visibility of staying for three years.

Remember, debt funds can’t guarantee you an interest rate. Fixed deposits from banks can. You can lose money in debt funds - in fixed deposits your principal is guaranteed. Without the lower tax, debt funds are not quite as attractive.

FMPs Might Be Dead

Fixed maturity plans that didn’t let you exit before a year, and took advantage of this tax arb are now effectively toast. Most of them are a year or so in horizon, and very few have a three year range.

When they are redeemed, and they have to be redeemed, they will incur short term capital gains tax.

New FMPs will have to be at least three years long.

This is a huge part of the industry, and if the industry loses even 100,000 cr. to bank FDs, that’s between 100 cr. and 1000 cr. (assuming 0.1% to 1% management fees) that the industry loses.

It Impacts You Now, Even For Exits After April 2014!

The change impacts you from “Assessment Year 2015-16”. In tax parlance that means it applies for Financial Year 2014-15, as assessment years are the year ahead.

If you thought you exited before the budget and are safe, you are not!

It applies retrospectively, in a way, because stuff you invested in the past will hurt you when you exit in the future. And then, if you’ve already exited earlier, you’ll pay more tax.

By the way this applies to:

  • Debt funds
  • Gold funds
  • Infrastructure non-equity funds
  • Monthly Income plans where equity is < 65%
  • Fund of Funds
  • (Don’t kill me I’m just the messenger)

Are Dividend Options Better?

Jaitley’s hurt you there as well. Earlier the dividend tax was 25% of the amount distributed, for debt funds. If a fund had Rs. 100 to distribute, it would pay out Rs. 80, and 25% of that (or Rs. 20) was paid to the government as tax.

Now with the new rules, they’ve changed that. They introduce a calculation in which you will only get Rs. 75 and Rs. 25 is paid out as tax.  (They apply the tax on what they calculate to be the distributable surplus).

Effectively, with the surcharges, your dividends are taxed at 28.2%. (It used to be 22%).

What to do?

Nothing. Just pay the darn tax. Mutual funds, even debt, continue to have their advantages. They don’t accrue tax if you don’t exit - so if you don’t need the money, you won’t pay the tax. (FDs make you pay taxes even if the money continues to compound). Second, there is no TDS on debt fund exits, which makes cash management a little bit easier.

Dividend investments make sense if you need to exit earlier than three years, if you are in a 30% bracket. But it may just be better to put the money in a fixed deposit instead.

I would continue to keep my money in the debt funds - why pay tax unless I need it? But of course if you own an FMP you don’t have a choice about the exit. FDs will probably have to be evaluated alongside a debt fund, and might win, considering the tax advantage is gone.

This is a rough part of the budget and affects the whole Mutual Fund industry. Let’s hope they can have it pushed out by another year (but don’t hold your breath).

Budget 2014 Direct Tax Summary: Almost Like There Was No New Government

5 comments Written on July 10th, 2014 by
Categories: Budget2014, IncomeTax

The Budget Highlights are here, in a quick summary. We’ll warn you: it’s almost like there was no new government. We’ve seen some minor changes.

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What you care about

  • Your taxes go down because of an increase of the base slab of 250K versus 200K (another 50K for senior citizens)
  • An increased 80C limit on investments upto Rs. 1.5 lakh
  • Housing loan interest, when you occupy the house, is exempt upto Rs. 200,000 per year. (Higher by Rs. 50K)

Mutual Funds Hit

  • Debt funds have to be held for 3 years to qualify as long term assets. This hits mutual funds very hard! (Full article coming soon)
  • For non-equity funds there was a microscopic dividend arbitrage, by charging dividend tax on the actually amount distributed instead of the “distributable surplus”. This has been bridged.
  • In effect, earlier if you distributed Rs. 85 as dividend, you would pay 15% of that, or Rs. 12.75 as tax. Now If you distributed Rs. 85, they assume you have Rs. 100 to distribute, so you must pay Rs. 15 as dividend tax. This has a big impact on mutual fund dividends, both debt and equity.
  • You had a lower tax of 10% on all gains of debt fund units. Now this is available for all other such listed securities or bonds, not just mutual fund units.

Government Finances

  • They’ll make 9.77 lakh cr. as tax revenue, and 2 lakh crores as non-tax revenue, taking us to nearly 12 lakh crore of government revenue (Up 15%)
  • Expenditure goes up by 12.6% to 17.9 lakh cr.
  • Fiscal deficit of 531,177 cr. which is 4.1% of the GDP, which therefore pegs GDP at 130 lakh crore.
  • This is going to be tough.
  • FY17 target of 3% fiscal deficit.
  • Stop laughing. But at least they have a goal.

Stop Smoking

  • Excise duty on tobacco upped from 11% to 72%
  • What other incentive do you need?

FDI

  • Upped from 26% to 49% in defence
  • Upped from 26% to 49% in insurance
  • Nothing about retail.

Investments

  • We know what happened with MFs earlier in this post.
  • Real Estate Investment Trusts (REITs) and Infra Investment Trusts (Invits) get pass-through treatment. Good for investors resident abroad, and for Indians who can pay lower capital gains taxes.
  • 15% of money spent in buying plant and machinery by manufacturers is allowed as a deduction for Rs. 25 crore or more (last year: Rs. 100 cr. or more). And extended to 2017.
  • 100% of expenditure deduction on capital assets of certain businesses like warehouses, hospitals etc. continues; adds semiconductor fab units and iron ore pipelines as new businesses.
  • Infra bonds issued to foreigners had only 5% withholding tax on interest paid. Now that’s been extended to all bonds (infra or not) that are long term. Applies till 2017.
  • FII/FPI investors were told the money they earn is business income, even if it should be capital gains. Now it definitely is capital gains. (Clarified)

Tax Policy Easing and Loophole fixes

  • Advance rulings available to residents too (earlier only for non-residents)
  • Remember the Cost Inflation Index? It’s what you use for Capital gains inflation indexation calculations. It will now be based on the “new” CPI, not a quasi index which was used earlier. Doesn’t change your life much.
  • Another loophole was removed where you could invest capital gains in 54EC bonds (like NHAI) over two years if you sold in the second half of the year, and get a Rs. 1 crore exemption. Now that loophole has been removed; you get just Rs. 50 lakh.

Don’t Claim Cap Gains on TWO Houses

  • I complained about the concept that you can invest capital gains of anything into a residential house.
  • Now it seems you can do this but only invests proceeds in one such house, not two.
  • This doesn’t help the bubble, but apparently there are many cases pending where people buy two houses and claim cap gains exemption on investment in both of them. End of that story.

CSR Is Not Deductible

  • Large companies must spend 2% of all profits on Corporate Social Responsibility. Companies wanted to deduct this spend from profits for tax purposes. But the Budget says no, it can’t be deducted - you have to pay it from post-tax profits.

More on indirect taxes and the rest of it later.

Budget 2014 Eases Taxes Marginally

5 comments Written on July 10th, 2014 by
Categories: Budget2014

What you really want to know about the budget: How it affects your taxes. So here goes:

Base Slab Upped by 50K to 250K

Your income upto Rs. 250,000 is exempt. (Earlier, Rs. 200,000).

If you’re above 60 years of age, the exempt limit is 300,000.

Above that, in a progressive manner:

  • 250K (or 300K) to 500K is 10%
  • 500K to 10 Lakh is 20%
  • 10 lakh plus is 30%

I.E. Nothing has changed. But this saves you about Rs. 5,000 in taxes from last year.

Housing Loan Interest Upped by 50K to 200K

Interest on your self-owned property gets an interest exemption of Rs. 200,000 per year. This was 150,000. Again, another unnecessary housing exemption (why don’t I get it for a car loan?) .

But that’s good for those of you who own houses and live in them. Rental houses can continue to deduct all interest, of course.

At the top bracket this saves you about Rs. 15,000.

 

80C Limit Hiked to 150K

The speech talked about your investment limits under section 80C hiked from Rs. 100K per year to Rs. 150K. We don’t know if this covers children’s education also.

If you’re in the top bracket, you save Rs. 15,000 more this way.

Our View: Okay, Better than we expected

We didn’t expect big tax changes. And we got some, however minor. So this is a good thing.

At the highest tax bracket you’ll save Rs. 20,000 at least. If you have a housing loan for owned property, you get another Rs. 15,000.

You basically get Rs. 1500 to Rs. 3000 per month extra to spend. Spend it wisely.

Budget 2014 Live at Capital Mind

1 Comment » Written on July 10th, 2014 by
Categories: Budget2014

Budget 2014 is on July 10, 2014 and we’ll have the coverage for you, live. Check this page for updates.

Sorry but this event's free plan only had 200 members. Will do a bigger thing later. Apologies!

Here's the tweet list:

Budget2014: Jaitley's been talking of cutting the fiscal deficit. We think he does it through Asset Sales. A LOT of them.

I think we should stop talking about 4.3% budget deficit versus 4.5%. Better to say every 0.1% is 13,000 cr. #Budget2014

Pre Budget: Nifty 7607, +22 10 yr 8.71%, USDINR 59.73 #Budget2014

Jaitley says the world has grown but the US might be jittery #Budget2014

Don't expect big things from a 45 day government: Jaitley #Budget2014

Need to increase Tax to GDP Ratio it seems. This is good, but will he not reduce taxes? #Budget2014

As I had stated, this is a kitchen sink budget. The real deal is Budget 2015. #Budget2014

Changes in Transfer Pricing! Very interesting. This can change a lot of things. Let's wait.#Budget2014

FDI in Defense: We buy stuff from abroad. Raised to 49%! #Budget2014

FDI In Insurance moved to 49%, all mgmt Indian #Budget2014

Retail e-commerce for FDI manufacturiers is okay #Budget2014

240,000 cr capital for banks required in five years. PSU Banks to issue shares to retail. GOI to keep stake on. #Budget2014

PSUs to invest more than 200,000 cr. as capex. Not sure this is important. #Budget2014

E-Visas in a phased manner, to promote tourism. Next 6 months. After: Visa on arrival #Budget2014

REITs and Investment Trusts to be pass through so both domestic and foreign sources benefit #Budget2014

Assured Irrigation: Pradham Mantri Krishi [ ] Yojana. #Budget2014

PPP in skill development? Kuch Hajam nahi ho raha. #Budget2014

200 cr. to erect a Sardar Patel statue of unity. #AllPartiesAreTheSame #Budget2014

Dude: 200 cr. for Sardar Patel Statue, 500 cr. for rural power? #Budget2014

Min Pension of Rs.1000 for Emp Pension scheme #Budget2014

EPFO to be improved via computerization #Budget2014

Currency notes to have Braille #Budget2014

PMGSY: 14,389 cr. for roads! Now we're talking. #Budget2014

8000 cr. for rural housing. But PPP? How? #Budget2014

Toilets and Drinking water in all girl schools. Big numbers mentioned, but I can't reconcile. #Budget2014

Teacher's Training program: 500 cr. #Budget2014

5 more IITs, 5 more IIMs: 500 cr. This is too little. #Budget2014

Software Product Startups to get a boost. I really need to see the details. #Budget2014

Metro Projects of Lucknow etc. gets 100 cr. 100 frikking cr? What the F? #Budget2014

Agro technology needs impetus.

Markets: 8.66% on the 10 year (-0.06%), USDINR: 59.78 flat, Nifty 7529 -55 #Budget2014

he's back, with soil deterioration. #Budget2014

Climate Change: Establish adaptation fund of 100 cr. #Budget2014

Finance to landless labourers through NABARD #Budget2014

APMC acts to allow private markets, great stuff! #Budget2014

500 cr. for agri price stabilization. Under frikking funded. #Budget2014

Farmer loans at 7% and then 4% if repaid, continues #Budget2014

Long term credit fund for agri through NABARD for 5000 cr. #Budget2014

Reforms in food: FCI reform is a priority #Budget2014

Wow. All central govt will implement e-based payment gateways and info by end 2014 #Budget2014

Promotion of startups: 10,000 cr. for equity, loan, quasi equity! Nice. #Budget2014

New Bankruptcy laws? #Budget2014

Dev of 16 new ports, port connectivity gets 11,600 cr. Big policy later for shipbuilding. #Budget2014

New airports through PPP and AAI. #Budget2014

37000 cr. to build roads. #Budget2014

15,000 cr. of gas pipelines through PPP? #Budget2014

Capital Markets need better regulation. "Indian Financial Code" soon. #Budget2014

RBI and Govt to put monetary policy framework. Whoa, turf war? #Budget2014

5% withholding tax for all bonds till 30th June 2017 #Budget2014

Allow international settlement of Indian debt! #Budget2014

Liberal bharat depository deposits #Budget2014

Indian FII managers to get tax passthrough! #Budget2014

Uniform KYC Norms, one single demat account for all fin assets. #Budget2014

New accounting standards voluntary 2015-16, mandatory for 2016-17 #Budget2014

RBI to create differentiated banks. Payment banks etc. #Budget2014

Revitalize small savings schemes. NSC with Insurance cover. #Budget2014

PPF increased to 1.5L? That means 80C increased at well, surely. #Budget2014

Wait for Part II for tax changes. #Budget2014

Ganga gets 2037 cr. Behti ganga mein... #Budget2014

NRI fund for Ganga? What? WE pay NRI's to clean the Ganga? DETAILS! #Budget2014

 

Lots of sports thingies. 100 cr. this, 100 cr. that. More when the paper comes out. #Budget2014

Displaced Kashmiri Migrants: 500 cr. to help. #Budget2014

Water Supply for Delhi: Renuka Dam. 50 cr. for this, bring your ink droppers. #Budget2014

Non Plan of 12 lakh cr., total 17+ lakh cr. #Budget2014

about 10 lakh cr. taxes, 2 lakh cr. Fisc deficit of 4.5% #Budget2014

Taxes now! #Budget2014

NO TAX RATE CHANGES! #Budget2014

Lowest Slab moved to 2.5 L from 2L, for senior citizens 3 L #Budget2014

Increase investment limit under 80C from 1L to 1.5L (Told you so) #Budget2014

Self occupied property home loan interest limit upped to 2L from 1.5L #Budget2014

Manufacturing sector - incentive for 100 cr. investment continues. Then 15% "allowance" for 25cr+ investment in plants #Budget2014

Fundmanagers of Foreign FPI investors can be in India, treatment of income as cap gains. (ok) #Budget2014

Tax on LTCG on debt funds to 20%, and time moved to 3 years! #Budget2014

Mutual funds are destroyed. Debt funds that is. What a mess. #Budget2014

Imported electronic products and telecom parts to get 10% duty? #Budget2014

Why the heck does he want CRT to be cheaper? Jeez. #Budget2014

Coking coal duty increased? We already have a shortage... #Budget2014

Deposit Growth at Lowest in 10 Months

No Comments » Written on July 9th, 2014 by
Categories: Banks, ChartOfTheDay, Macro

Bank Deposit Growth as of 27 Jun 2014 is now at the Lowest since September 2013 at 12.4% over the past year. In Sep 2013 and Dec 2012, we had a market crisis of sorts when the indexes fell nearly 20%. This time, it’s the other way around - markets were close to an all time high!

image

Of course, don’t think of this as “bearish” news. We’ve seen recently that even if you had news that all Indian top companies were frauds, the market would go up.

Four Things the Economic Survey Tells Us This Government Will Do To Cut Inflation

1 Comment » Written on July 9th, 2014 by
Categories: Budget2014

The economic survey for 2013-14 is out. The salient points they say brings us to some conjecture on what they will do tomorrow to contain inflation. Here’s the source.

Move To Market Prices for Fuels

They say:

It is important to be cognizant of the fact that deregulation of diesel prices, power–sector
reforms, and generally the move from administered to market-determined prices will release suppressed inflation in the
short run. Nevertheless, the consequent reduction in subsidy and fiscal deficit will have the salutary effect of reducing inflation

It would be a little crazy to deregulate prices entirely in one shot, given public resistance, But it’s likely that the government reduces duty for diesel, petrol and LPG to the extent that the pressure of moving to market prices will ease up.

Selective NREGA

The Rural Employment Guarantee Act does not target productivity. In fact it targets the lack of it by disallowing spending on machinery.

The Economic Survey says:

The projects selected for schemes like the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) do not improve the productivity of the agricultural sector commensurately. The increasing wages under such schemes have reportedly created shortage of labour in the agricultural sector as well as caused a wage-price spiral. The solution lies in selection of productivity-enhancing projects for ambitious public policy programmes like the MGNREGS

Does this mean we see the scope for the employment guarantee act reduced? I would personally welcome that. The concept of people getting paid regardless of what they produce is phenomenally dumb.

Limiting MSP Procurement and Making FCI Efficient

Here’s something you didn’t know:

If the policy of supporting farmers through MSP and procurement is to continue, the MSP should be scrupulously linked to the cost of production. Procurement should not be open-ended, and the practice of some state governments of charging as high as 14-15 per cent mandi fee/tax and paying high bonuses over and above the MSP must be discouraged. Experience has shown that the Food Corporation of India (FCI) has not been able to release enough stocks in the market to soften cereal prices while recovering its economic cost. While farmers can be incentivized by gradually removing restrictions on exports, the FCI can learn to procure stocks from markets more efficiently and manage risks through the futures market

Could this mean there is a revamp of the FCI infrastructure? It’s highly inefficient.

Plus, we’ve already seen that FCI will change procurement where states give additional benefits over MSP. This extra “bonus” is a very bad idea, and distorts the economics.

The focus on ‘public-private’ partnership might just mean that FCI loading and unloading is subcontracted out, and FCI employees better get ready to start working more. And with a focus on limited procurement, things could change significantly for the agri sector. In the short run it’s not good, but for the longer term, this is great.

Remove Fruits and Vegetables from APMC

They say:

The State Agricultural produce marketing committee (APMC) Acts have created monopolies and distributional inefficiencies. They constitute a major roadblock in the way of creating a national market for agricultural commodities. Apart from breaking the monopoly and dissuading state governments from treating the APMCs as liberal
sources of revenue, substantive efforts have to be made to create alternative trading platforms in the private sector where it is possible to reduce the layers of intermediation. Since this may take time, fruits and vegetables should be taken out of the purview of the APMC Acts immediately. A processor should be able to buy directly from farmers without having to pay any mandi fee/tax to the APMC.

Basically, we’ll cut the APMC down to size. These are terrible markets now, since the markets are dominated by trading families and who don’t allow outsiders to get in. Many conduct only voice auctions which can be manipulated. And there’s no real need to pay tax to a mandi when it has failed in the function it has performed.

This is going to be fun, because the opposition parties will hate any or all of this. However, it might be that they only set the stage for such things tomorrow. (Changing the APMC for instance, is not really a budgetary function).