‘Tax rates must fall, ability to pay tax must rise’

Does the interim budget address my concerns on recession & job losses?
No new announcements have been made, so these concerns are presumably left for the next government to deal with. The focus is on social security schemes for the poor, not urban worries about white collar jobs. Rajesh AR, vice-president of Bangalore-based staffing firm TeamLease, says, “There is no budgetary impact on the job market. Businesses are slowing down and firms are becoming more conservative on adding to their headcounts.”
 
Will taxes be cut at least after the elections?
Pranab Mukherjee did throw hints to that effect. “In the days of financial stress, tax rates must fall and our ability to pay taxes must rise.” Sachchidanand Shukla, economist at Enam Securities, says, “There could be an attempt to revive demand. This could see some cutting of taxes both on the indirect as well as the direct taxes front.” Soumendra Dash, chief economist at rating agency Care, says, “People need more purchasing power. This could result in a pro-consumer, pro-investor tax policy.” But don’t count on it. “I don’t expect any tax cuts,” says DK Joshi, principal economist at Crisil.
 
What will happen to inflation & prices?
Inflation is down and is likely to become negative by mid-year. “The next quarter will see a declining patch in April-July. For the new financial year as a whole, inflation is expected to be at 4%,” says Shukla. Dash says the falling trend in inflation could continue and, by the end of March, it could be at 2.5-3%. But there may be worries later in the year, if the government continues to spend big without worrying about the fiscal deficit — the gap between government spending and revenues. If that happens, inflation could re-emerge next year.  
 
What about my home loan? Will EMIs come down?
With inflation on its way down, the Reserve Bank will cut interest rates further. “I think the repo rate (currently 5.5%) can be cut by 1% if inflation falls to 4%,” says TS Narayanasami, chairman and managing director, Bank of India. (Repo is the rate at which the RBI lends to banks). “Getting into a lower interest rate regime is necessary to turn around the economy,” says Suresh D Tendulkar, chairman of the Prime Minister’s Economic Advisory Council. So don’t fret. Those EMIs will come down this year. 
 
With interest rates falling, where should I invest now?
One simple option is to lock your investments in bank fixed deposits when the rates are still in the 8-9% range for various tenures. Canara Bank is currently offering 10% on its one-year fixed deposit. It won’t remain that way for long. Some tax-saving fixed deposits, which come with a lock-in of five years, offer rates in the range of 9-9.5%. Other tax-saving options like National Savings Certificates, which offer an interest of 8%, remain good bets, too, especially given their tax benefits.
 
I lost money in stocks last year. Will it be the same this year?
The BSE Sensex fell 331 points after the interim budget. Explaining the rationale for the market reaction, Gaurav Dua, head of research, Sharekhan Ltd, says: “The fiscal deficit estimate of 6% for 2008-09 is higher than expectations and indicates fiscal stress.” Broking house Religare says January-March earnings of Sensex companies could decline by 15-17%. Experts expect the markets to move on global cues. “We continue to believe that in the near-term, the market will be dictated by global moves,” says Dinesh Thakkar, CMD, Angel Broking. In short, stocks are only for people willing to take long-term risks.
 
What about mutual funds? What kind of funds will do well?
Equity funds are not for the faint hearted. So systematic investment plans remain the best way. Short-term bond funds are the best place to be in now. These funds essentially invest in short-term securities issued by government and companies. The high fiscal deficit will mean more market borrowing, which will mean higher interest rates on long-term securities. “This means the most optimal investment would be in short-term bond funds. Gilts and income funds are more susceptible to interest rate risks,” says Sandeep Shanbhag, director of Wonderland Consultants.
 
Will cars, PCs, TVs and durables be cheaper after the budget?
Given weak demand, manufacturers will indeed cut prices. But Sumanta Mukherjee, PC analyst for tech market-research firm IDC India, says people may prefer to upgrade at the same price. “In the short term, you might see price-cut strategies. But that will be to liquidate stocks,” he said. “Gadgets and electronic goods are not simple commodities that are bought on the basis of price alone. People are looking for a more and more compelling reasons to buy and we will see vendors offering more and more features,” he says.

This doesn’t look like a regular budget. What’s up?
You’re right. In election years, governments don’t present regular budgets but instead seek parliament’s approval to continue spending at the old rate for three or four months. That’s why it’s called an interim budget, or vote-on-account. The full budget will come sometime in July. “The government did not announce tax changes or any new policies in the budget because it is only for three to four months,” says Indranil Pan, chief economist, Kotak Mahindra Bank.

(With inputs from Joel Rebello, Sachin Mampatta, Sreejiraj Eluvengal, N Sundaresha Subramanian, Vivek Kaul and Agencies)