Impact ![]()
In the Union Budget 2011, the Government proposed to increase the service tax on life insurance products both traditional and Unit-Linked Insurance Plans (ULIPs). The proposal (if implemented) may now shoot up the costs borne by the life insurance industry by 50 - 75 bps, and whereby the premiums too are expected to rise by 50 - 75 bps.
Mr. S.B. Mathur - Secretary General, Life Insurance Council too commented on the proposal by saying, "Policies are going to get costlier with the increase in service tax. While traditional plans will cost nearly 50 basis points more, ULIPs may see a 75 basis points increase."
In the Budget 2011-12 the Finance Minister proposed to increase the service tax on life insurance to 1.5% from 1.0% for traditional plans - where investments from the premium collected are made as per the regulatory guidelines. Currently, policyholders of traditional endowment or money-back plans need to pay 1% of the total premium as service charge. Also in ULIPs, where the policyholder chooses the investment mix (how much to put in equity or debt), the service tax will be charged on the portion of the premium not allocated for investment, like premium allocation and policy administration charges. At present, the service tax is only on mortality and fund management charges.
Reacting to this proposal, Mr. G. Srinivasan - CFO, Bharti Axa Life Insurance, said "This taxing of the allocation charges and policy administration charges will affect the yield, and we envisage at least 20-25 bps reduction in yield for the policyholder."
We believe that increase in service tax for life insurance was uncalled for in the Budget 2011. On one hand the IRDA has capped the charges on ULIP to make it more viable for the policyholder and on the other hand increase in service charges would nullify that benefit to a considerable extent. Hence, we think that the Government should rethink on its decision to increase the service tax on life insurance.
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The Union Budget 2011 had a very little impact on the mutual fund investors. However, keeping the structure of fund investment intact, the Government in order to provide an impetus to the mutual fund industry, permitted foreign investors to invest in equity schemes of Indian mutual funds subject to the Know Your Client (KYC) compliance.
The Government has also shown concern towards making the mutual fund industry more broad based by allowing of foreign investors to access equity mutual funds. While this market will take some time to develop, it isn't something that will impact the returns that domestic fund investors can generate.
In our opinion, while the moves taken by the Government may enable mutual fund houses to garner more Asset Under Management (AUM) as foreign investors participate in the Indian equity markets (through the mutual fund route), we believe that this may also bring in some wild swings in the flow of funds to the mutual fund industry (unless we get long term foreign investors). Also, the Government should infuse more clarity on the issue of how KYC norms should be met by foreign investors as they (foreign investors) may not have requisite documents (say for example a PAN card) as required as per our rules in India. | Multibagger Stock Ideas
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Impact ![]()
The Indian economy is estimated to have grown at 8.6% in 2010-11 in real terms, and has shown remarkable resilience. Going forward too, in the fiscal year 2011-12 this robustness is likely to be retained as the economy is expected to grow by 9.0% (with an outside band of +/- 0.25%) as projected by the finance minister.
 (Source: CSO, PersonalFN Research)
Moreover during the period April 2010 to January 2011, exports as well as imports too have grown by 29.4% and 17.6% respectively, thereby reducing the pressure on the country's current account deficit.
However elevated prices of food articles have been principal concern this year, as they led to high food inflation resulting in stiff WPI inflation. But the monetary actions taken by the RBI so far is now expected to moderate WPI inflation in the coming months, which in turn would also lead to average inflation lowering by next year and current account deficit too mellowing.
We believe that fundamentally the Indian economy is in good shape to achieve the growth expectations of the Government. However, the double digit food inflation and rising crude oil prices are the key factors to keep a tab on.
| | | Weekly Facts |
| Close | Change | %Change | | BSE Sensex* | 18,486.45 | 17,700.91 | 4.44% | | Re/US$ | 45.04 | 0.4  | 0.97% | Gold /10g | 20,970.00 | 10.0 | 0.05% | | Crude ($/barrel) | 115.96 | 4.1 | 3.69% | | FD Rates (1-Yr) | 7.00% - 9.00% | Weekly change as on March 3, 2011
*BSE Sensex as on March 4, 2011
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In this issue
| | Union Budget 2011
What does that mean for you and your investments? How the taxation changes impact your income and savings? Will the budget moves also get your investment in the markets moving or any other investments will become more attractive? What is the economic forecast for YOU, the common man? To make sense of it in the context of your investments, PersonalFN, in association with Equitymaster, brings you Our View on the Budget.
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In an interview with the Financial Express, Ms. Jyoti Vaswani - Chief Investment Officer (CIO), Aviva India, shared her views on the Indian equity markets and the December 2010 quarter (Q3) earnings.
Ms. Jyoti believes that the current market conditions present a good opportunity to buy quality stocks. However, she cautions on the slow pace of investment in infrastructure sector which could pose threat to India's medium-term growth. Also, in her opinion the supply side constraints, global economic recovery, second round of quantitative easing, and rising food and commodity prices are posing a challenge.
According to her, earnings of the December 2010 quarter have mostly been in line with the expectations. She explains that while the banking and financial sector surprised positively, telecom and FMCG sector numbers were below expectations. She adds further by saying that, "Margins have been under pressure this quarter in several sectors like auto, FMCG, IT, telecom and utilities. "We see some earnings downgrade risks. However, most of the components of Sensex such as IT, energy, commodities and financials carry limited risk. Risks however, do reside in auto, industrials & infrastructure as interest rate and high commodity prices could impact growth as well as profitability."
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Budget: An estimation of the revenue and expenses over a specified future period of time. A budget can be made for a person, family, group of people, business, government, country, multinational organization or just about anything else that makes and spends money. A budget is a microeconomic concept that shows the trade-off made when one good is exchanged for another.
(Source: Investopedia) | |
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