Budget 2018: What could it mean for your investments?

In a way, the Union Budget is a simple accounting exercise. The government tells you about the finances; the tax and non-tax revenue and expenditure for the year gone by and estimates for the year ahead.

The Budget influences different aspects of your personal finances. There are a number of things you must watch out for as the finance minister makes his speech in the Lok Sabha on February 1, 2018.

Equity markets

If you are an investor in the stock market, you must concentrate on statements that dwell on the future of the economy. The stock market reacts, almost immediately, if the Budget estimates (on the fiscal deficit) for the year ahead happen to be different from the overall market expectation. The fiscal deficit equals the market borrowing the government has to do to meet the estimated shortfall in revenue.

If the government projects to borrow more than expected, interest rates tend to harden. This is bad news for financial markets as businesses are often looking for a low-interest rate regime to thrive. For the year ending March 2018 and March 2019, analysts are already predicting a higher fiscal deficit. So, when you read through the Budget reports, look out for the estimate of the fiscal deficit. It should not be more than 3.5 per cent of the GDP. For 2019-20, the deficit estimate should not be more than 3.3 per cent of the GDP. Any number higher than this estimate could trigger a selloff in the equity markets.

Your investments

The big debate currently going on is about the re-introduction of the long-term capital gains tax on equities. Your profit on shares or equity mutual funds accrued over one year is exempt from the long-term capital gains tax (LTCG). If you book profits within one year, you are liable to pay short-term capital gains tax at 15.45 per cent. There is speculation that the government is losing close to Rs 50,000 crore in revenue by not charging long-term capital gains on equities or equity mutual funds. So, many expect the government to abolish the securities transaction tax and bring back the LTCG tax. It is estimated that the STT generates about Rs 6,000 crore in revenue. It is a small sum as a percentage of GDP.

Overall savings rate

The government has consistently brought down rates offered on public saving schemes like PPF, provident fund or National Savings Certificates. This is in line with the overall downtrend in the interest rates in the economy. The government wants you to save more and invest your money in schemes that offer market-linked returns (defined contribution schemes like NPS) than guaranteed ones (defined benefit schemes). The government is unlikely to make any changes to the current rate of 7.6 per cent on PPF. It may look at reducing this rate to encourage people to invest in the national pension scheme or NPS.

GST, personal tax rates

Since this is the last Budget of the Narendra Modi government, it is likely that the government may consider enhancing the basic tax exemption limit to Rs 3 lakh from the current level of Rs 2.5 lakh. The Budget may also take off some tax deductions or add more people in the tax net to balance the impact of the basic exemption limit. On goods and services tax, the government will have to adhere to the GST rates prescribed by the GST Council. The Budget will not be able to change anything. This is a significant development. There was a lot of attention on the changes made to indirect taxes like excise duty across sectors.

Rural India focus

Going forward, many analysts expect the government to direct expenditure to rural roads, job creation and housing. So, companies dependent on the rural economy like those in the fast moving consumer sector, rural housing, irrigation and rural lending are likely to benefit. If you do not follow specific stocks, you could ask your advisor to suggest mutual fund schemes that concentrate on picking companies that ride on rural growth.
(The author is a former business journalist and founder of Simplus Information Services)

Decline in savings rate
The government has steadily decreased the interest rates on public savings schemes like PPF, NSCs as it wants the public to invest in financial products that are market-linked

15.45 per cent will be the shor-term tax payable, if an investor books profit within one year from the date of investments.