Don’t expect too much from Budget 2016

The nifty has crashed 22% from the top and now all eyes are on budget which will be presented this month end. There are lots of expectations from the finance minister but things are not going to be easy for him. The present economic situation reminds me the 20-20 match where in last over second team has to score 10 runs and 9 wickets are already down. As it is difficult to predict who will win the match the same way it is difficult to say everything will be all right after budget. But do not forget as that was not last match, this also will not be the last budget.

The analyst will look at the allocation to the new infrastructure and other projects to give boost to the economic growth and also watch the fiscal deficit closely. This year the target of 3.9% of fiscal deficit is likely to be met, but the next year target of 3.5% will be difficult to achieve. The additional burden of seventh pay commission and one rank one pension will not allow FM much room to allocate much for the economic growth. But anyway if he allocates more for this either he will increase the tax or keep fiscal deficit figure higher and in both case short term movements will be much volatile. The present NPAs of PSU banks will also add fuel to the situation.  FM also has to allocate some fund to them. It is really unfortunate that after 50 years of operation PSU banks are not self sufficient and always look for infusion of capital from the center. Really we must thanks RBI Governor for identifying the problem and taking necessary steps. Situation is alarming and I also urge him that funding to corporate should be made transparent and the names of all defaulters should be published and made available in public domain.

This budget is also important as nobody have thought that after having one party stable government our economic situation will worsen like this and rupee against the dollar will head towards 70 mark again. I don’t understand if 70% of our import bill is for importing crude oil and the crude oil is down 70% why still Indian economy struggle. Even after so many international visits of Hon’ble Prime Minister, we have not seen the desired foreign investment. There is no doubt unlike in 2008 this time the problem is external. The slowdown of Chinese economy and uncertainty over US interest will drive the market. We should also not forget that our stock market is FII driven and till they stop selling things are unlikely to improve immediately. The bad monsoon has also lead to higher CPI inflation and the rate cut is also not seen in near future unless we see a landmark budget this year. The market is also watching keenly capital gain tax issue which is talked around and also disinvestment target so that gap can be reduced.      

 

The investors should avoid the noise and rumors around them. They should continue their SIPs and if possible increase the SIP amount if their time horizon is 5 years plus. Also investor need to review their existing asset allocation and if the fund is available needs to be reinvested in equity for longer term. For lump sum investment it is always advisable to invest in hybrid funds like balanced funds and equity savings fund instead of putting money in pure equity schemes. Timing the market is difficult and it is to be avoided. It is important to stay invested for longer period without looking at daily volatility for better result. We should also not forget this year our economy will grow at 7.5% and likely to beat Chinese growth.

As far as budget is concern, I think hike in minimum exemption and deduction limit for individuals is unlikely. The rate of interest of postal schemes and PPF is very much likely to go down by minimum half a percentage. The service tax is also likely to be increased from 14 to 16% looking additional burden next year.  So don’t expect too much from the budget and keep your fingers cross. If it surprises you then it will be bonus for us.

This article first appeared at indianotes.com
http://www.indianotes.com/Analysis/Dont-expect-too-much-from-Budget/200028/6/PF