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2020 Budget and Beyond!!

The last month has been dominated by news related to the budget. There have been many predictions in the lead up to the budget and reactions after the budget was presented on 1stFeb.

The equity markets have also been volatile. But it is interesting to see that the net change in the Sensex is only 0.3% over the last one month! Let us take a closer look today at what the budget has proposed, other current economic events and what we should be doing going ahead.

Budgetary proposals and impact on our personal finances

  • New IT slabs have been introduced (along with deductions/exemptions being removed). Income tax payers have the option to choose between the old and the new tax structures
    • The impact is low either ways for most tax payers
    • Do keep in mind that less than 10% of taxpayers have claimed deductions of more than 2 lakhs. For others, moving to the new system brings simplicity and avoids having to show lots of documentation
  • Dividend Distribution Tax (DDT) for companies and mutual funds has been removedand now investors need to treat dividends as ‘other income’ and pay taxes
    • We have never been a fan of the dividend option for mutual funds and the new rules reduce the attractiveness of dividend options even further
  • Employer contributions to PF/NPSand other superannuation schemes beyond Rs 7.5 lakhs a year will now be taxable
    • This is definitely a negative for high income tax payers who are saving through PF/NPS and it further increases their tax liability
  • Deposit insurance for our bank deposits will increase from 1 to 5 lakhs. This is a positive for those who have large amounts of money in fixed deposits
  • For NRIs to retain their NRI status, they have to stay outside the country for 240 daysor more in the year (up from 182). This will not impact NRIs staying outside on a long-term basis

Overall, the impact of these measures is marginal. The plan to keep the fiscal deficit at 3.8% is a big positive for the bond markets. This will help keep the interest rates under control in the short term. The lack of long term economic reforms continues to be disappointing.

Other Economic Events

  • 20% drop in Brent crude prices!!– In early Jan Brent crude oil prices had gone to nearly 70 USD/barrel. In the last month, oil has receded rapidly to 55 USD/barrel. While the future cannot be predicted, this is a short-term bonanza for an oil importer like India
  • India’s Purchasing Manager Index (PMI) is at an 8 year high– The manufacturing PMI in India shot up to 55.3 in Jan 2020 with robust growth in new orders and output
  • GST collections is the second highest ever at 1.1 lakhs in Jan 2020– The GST collections of 1.1 lakhs in Jan 20 means that we have had three consecutive months of above 1 lakh GST collection
  • 2019 Foreign Direct Investments (FDI) at 49 Billion USD – Calendar year 2019 saw the highest ever FDI flowing into India with a 16% increase from CY2018
  • Drop in Retail Automobile Inventory– As per FADA there was a drop-in inventory levels to 20-25 days from 25-30 days. However, retail automobile sales fell in December even as the industry prepares for the BS VI transition

Overall, it does look like things are beginning to bottom out in the economy.  As investors, we should continue to maintain the discipline in our investing journey.  What we can control is our investment behavior.  We should not get distracted by the noise from short term events. We should remain focused on the long-term goals, and maintain our asset allocation accordingly.

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