Financial Daily from THE HINDU group of publications
Saturday, Mar 05, 2005
Markets - Mutual Funds
Budget: Helping mutual funds unlock value
Given that the economy is already in a robust growth phase, the Finance Minister has rightfully sought to maintain the momentum by bringing about a few, but impactful changes that will add further stimulus to the reforms process.
The mutual fund industry certainly has reason to cheer. Mr Chidambaram's move to allow mutual funds to offer Gold Exchange Traded Funds will help the industry structure products that seek to unlock the huge investment currently locked up in physical assets such as gold. The abolition of the Section 88 under the Income-Tax Act and the removal of caps on investment in tax-saving instruments effectively mean that Equity Linked Savings Schemes (ELSS) can attract tax saving of up to Rs 1,00,000.
Given that Tax Plans are among the few equity-linked tax saving instruments, this measure will go a long way in enhancing the prospects of this product.
The new direct taxation policy effectively brings down the tax liability for middle-class households. This should result in an increase in their propensity to save/consume, which in turn, will increase the industry's potential to attract retail money/drive consumption-led growth respectively. The tax norms on the long and short term capital gains on equity investments announced in the Finance Minister's last Budget were measures intended to increase retail participation in mutual funds.
The retention of the norms on capital gains tax is positive for the industry. The marginal increase of STT from 0.015 per cent to 0.02 per cent is not likely to have any material impact on mutual fund investments.
The proposed amendment to the Securities Contract Regulation Act will facilitate trading in securitised assets. The move to rationalise stamp duty between banks and other financial institutions is a step towards creating a level playing field between these entities. The treatment of income from derivatives as business income rather than speculative income is another move that will increase institutional participation in the derivatives segment of the capital market.
This will also help portfolio management businesses to attract investors by structuring innovative products.
The reduction in corporate tax will increase the profitability of companies, which is a positive for the market. Employment-generating industries such as textile, pharma, construction, sugar and mining stand to benefit from the Budget, which augurs well for the equity market.
From a macro perspective, some of India's biggest setbacks have been illiteracy, unemployment, slow pace of agricultural reforms and healthcare. The steps taken in the Budget to support agriculture, manufacturing and SMEs are, therefore, favourable for the economy.
The intent to invest sizably in infrastructure and invest in human resource development by way of education and health are also progressive steps that will attract investment and fuel growth in the economy. The success of the Budget will now depend on implementation and containment of the fiscal deficit.
(The author is Managing Director, Prudential ICICI AMC Ltd.)
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