People look forward for the finance minister to present the budget each year with an excitement that reminds you of children waiting for Santa Claus at Christmas. This year too, everyone huddled in front of TV sets, anxiously waiting for Pranab Da to untie the sack and give out gifts that they were waiting for one year. Tax cuts, reduction in prices, tax exemptions, etc. were some of the gifts that everyone expected but the FM was not in a mood to bring cheers to his fellow citizens.

Budget 2012 was lackluster and did not amount to what was expected of it. The only comfort it provided was that it wasn’t bad either. It was just an ordinary budget, which was devoid of any bold initiatives and bending to coalition pressures, especially after the Congress party took a beating in the recent state elections.

Income

Let’s look what the Finance Minister has in store for you this season.

The first thing every salaried person looks forward in a budget is the income tax. Has he increased the income tax? What is the exemption limit? In which slab am I this year? Hey, I am a woman, how much less tax should I pay than my husband?

Well, for those who were looking for tax exemptions could cheer a bit because the exemption limit has been increased to Rs. 2 lakh this year from Rs. 1.8 lakh the previous year. Finance minister also seems to have woken up to the fact that men and women are equal after all because tax exemption up to Rs. 2 lakhs is same for both the sexes. Sorry ladies!

The rest of the income tax is to stay the same i.e. 10% for those between Rs. 2 lakhs to Rs. 5 lakhs, 20% income tax for those earning Rs. 5 lakhs to Rs. 10 lakhs and 30% for those earning above Rs. 10 lakhs. You can cheer or grieve about it, depending up on the amount you earn in a year.

Investments

Now that you know there isn’t much to cheer about on the income front, let’s see if the finance minister has anything in store at the investment front.

The finance minister failed to implement the much hyped up Direct Tax Code in this budget. In an interview outside the Parliament after the Budget, Pranab Mukerjee sought to introduce DTC in the next fiscal.

Budget and 80C: This means that the provisions in 80C are going to be the same and for those who are invested in it will have a thing to rejoice. You can avail tax exemptions by investing in schemes that come under 80C. Especially cheerful is the fact that you could invest in Equity Linked Saving Scheme for one more year and you can avail tax exemption and also earn good returns.

Rajiv Gandhi Equity Saving Scheme: The budget proposes a new tax exemption under Rajiv Gandhi Equity Saving Scheme. Under this, 50% of investments done in equities will be exempted for an amount up to 50,000. However, the investments must have a lock in period of 3 years and only those whose income is less than Rs. 10 lakh can avail this facility.

Securities Transaction Tax: For those who trade in the stock market, there is a small reduction in Transaction Taxes from 0.125% to 0.1%. Though the amount seems to be less, it would help save lots of money for those who invest and trade heavily in markets.

How Budget Affects Investments in Insurance: If you are planning to invest in any insurance schemes this year, make sure that the sum assured must be 10 times the premium paid. Otherwise, you would not be eligible for tax exemption under 80C. Earlier it was only 5 times the premium. By increasing this limit, the Finance minister has made sure that only term insurance will be eligible for the tax exemption. The Unit linked schemes will suffer as a result because the sum assured is not 10 times higher than the premium paid on it.

Tax Exemption for Medical Check Up: In addition, the budget has introduced a Rs. 5000 exemption for medical check up for an individual. However, this amount is included in the  Rs. 15,000 tax exemption for health insurance that already exists. If you avail Rs. 5000 exemption for a medical check up, you have to reduce your medical bills by Rs. 5000 and vice versa. So it is a question of either or. Good way to put the common man in a fix.

Infrastructure Bonds: Previously, there was a great demand for infrastructure bonds coming under 80CC that made it possible for those who invest in it to save an extra Rs. 20,000. This year, the finance minister has decided to stop it and so buying infrastructure bonds will attract taxes. Doesn’t the government need any more money for infrastructure developments?

Consumers

This is a rough outline on how your income and investments are going to be taxed this year. Now looking from a consumer point of view, there isn’t much to be happy about too.

The service tax is increased from 10% to 12% and also the excise duty is increased from 10% to 12%. This will increase the price of many goods and services ranging from hotels to hospitals and from manufactured goods to gold.

For you, this could be the worst part of the budget. This is because, the bulk of the urban population is dependant on one type of service or another. This is where the Finance minister has dug his hand deep into our pockets. The charges on services are going to increase and will surely eat into your income.

So much for the tax exemption being raised from Rs. 1.8 lakhs to Rs. 2 lakhs. As if the service charge was not enough to hurt the urban population, the Finance minister has also sought to increase the excise duty too, thus raising the price of many goods.

The budget fails on many other accounts also, such as tackling inflation, curbing black money etc. However, increased investments have been directed to agricultural credit, R&D and for storage capacities, which will help the sector to pick up.

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1. Investing: Making Sense of Assets and Liabilities

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With the number of young population the highest in the world, India is set to become one of the key global economic players of the 21st century. Foreign investments are flowing into India because of its huge potential. In the last two years the FDI flow to India was around $48 billion. FII flow into India in 2010 was more than $38.76 billion.

5 Ways to Invest in India

So, how can you be part of this growth story?

Individual investments are restricted in India. The law states that no foreign individual can start a private firm or partnership firm in India. Though, the government allows foreign investments in the form of Foreign Direct Investment or FDI and by Foreign Institutional Investors or FIIs. Recently, the government has allowed individuals to invest in stocks and mutual funds, which is a welcome sign.

Investing in Indian Stock Markets: The government recently announced that qualified foreign investors can directly invest in Indian equity markets. Foreign individuals were earlier barred from entering Indian markets directly. The Indian Government’s move is to increase the inflow of foreign capital and reduce volatility in markets brought by FIIs. However the government says that only qualified foreign investors are eligible to invest, which might mean that the foreign individual must fulfill some criteria like expertise etc. before investing.

With the opening up of Stock market to foreign individual investors we are entering a new phase of liberalization which began in the early 1990s. Nevertheless, it must be seen how much investment could be channeled into India and how much of volatility could such a move actually reduce.

Investing in Indian Companies Listed on Your Stock Exchange: Many Indian companies are listed on foreign stock exchanges. You can invest in these companies, but only after a thorough study of the company and its performance.

Companies like Wipro, Infosys, or TATA Motors are listed on major indices such as NYSE, LSE etc. These companies are blue chip companies and have been performing well in the long run.

Investing in Mutual Funds in India: Recently the Indian Government has allowed retail foreign investor to invest in mutual funds in India. The government expects up to $10 billion in investments through this method. The government’s move is to tap in more foreign investments and to raise the foreign reserves.

Till now only Foreign Institutional Investors were allowed to invest in Indian mutual funds. By this move any foreign national can invest in it and be part of the Indian growth story. FIIs were very volatile and used to wreak havoc in the stock exchanges.

Foreign individuals looking to invest in mutual funds must open a demat  account in India. They can place orders directly to buy Mutual funds on the depository participant.

Investing in Exchange Traded Funds (ETF): This is another way through which you can invest in India. ETFs are funds that follow the performance of index. You can know more about it if you check with your broker. Before investing in ETFs it is better you track the movements of Indian indices. Only after careful consideration should you invest in ETFs.

Some examples of ETFs available in your country are WisdomTree India Earnings Fund ETF (NYSE: EPI), iShares S&P India Nifty 50 Index Fund (NASDAQ: INDY), etc.

Foreign Companies can Invest in India: Through this method companies can invest in India in collaboration with an Indian company, or by opening a branch office here, or forming a wholly owned subsidiary of the foreign company. However, individuals cannot invest in this way.

Anyway it is definitely clear that Indian investment environment is changing. Now more foreign players are being attracted to the Indian growth story and coming to India to invest. Moreover, the government is doing all in its power to see that these investors are not disappointed.

Related posts:

1. Reserve Bank of India: Its Role and Functions
2. Understanding FDI: What it means for India?
3. Weakening Rupee: Good for NRIs, Bad for Indian Economy

------------------------------------------------------------------------------------------------------------------------------------------------ Another great post from:Money Guide India. Read the original version at: Invest in India; Be Part of the Great Indian Growth Story. ------------------------------------------------------------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------------------------------------------------------------ Like this post? Why don't you subscribe for more? Here is the subscription link. ------------------------------------------------------------------------------------------------------------------------------------------------

FDI flows to developing countries stood at $354 billion in 2009.  UNCTAD’s FDI prediction for 2011 is between $1.3 trillion and $1.5 trillion.

India not Happy about FDI

Foreign Direct Investment into India totaled only $23.7 billion during 2010-11 (according to UNCTAD). India is not much enthusiastic about FDI investments. At present, the country only allows 100% FDI in single-brand retail trade like Fendi, Jimmy Choo etc.

It was also reluctant to FDI in multi-brand retailers like Wal Mart, Carrefour etc. until recently. Currently, the government has allowed a 51% FDI in this sector.

India fears such FDIs could harm the domestic economy rather than uplift it. The main argument against multi-brand retailers is that it could destroy small retailers and manufacturers. Experts predict about 4 crore people will lose their employment once FDI in retail sector is allowed.

Benefiting from FDI

Those who support FDI claim that the country which accepts FDI will benefit economically; increased job opportunities, higher standards of living and better infra structure are some of the positive that flows from FDI. A visible impact of FDI on the growing economy is that it gets a quick supply of money.

To back their claim they site the example of “The Asian Tiger” economies such as China, South Korea, Singapore and the Philippines that benefited from FDI in to their economy. In the case of China FDI has really been a better step for improving the economy. Chinese economy has welcomed FDI since 1970 and the investment rose to a whopping $274.6 billion in 2010 (according to UNCTAD).

There are positives that India can benefit from by more FDI flows. Farmers tend to get higher prices for their products by direct purchase by these retail houses. Middlemen are notorious for keeping the prices given to farmers low. Big retail companies will find direct purchasing profitable thus farmers will get a better deal for their products. Consumers also stands to gain as prices will go down due to direct purchase and competition.

Though the inward FDI is showing a decline in India, it is estimated that Indian will soon be the source of outward FDI to other countries. Most of the outward investments are in the areas where India is successful i.e. Auto, IT, telecom to name a few. Outward FDI by Indian companies was $43 billion in 2010-2011.

Why Companies Opt to Invest in Foreign Countries?

Companies go for FDI looking for cheaper resources and better operational benefits for production. This resource seeking FDIs eventually makes huge profit by moving their entire production line to the new country.

Companies look for optimizing the available opportunities and economies. And that result in transfer of strategic assets. This form of FDI aims at improving the overall efficiency.

A company that goes for Foreign Direct Investment could possibly enjoy many incentives in the new country. Some of the tax benefits or concessions like low corporate tax and income tax rates could invariably boost the company’s profit.

Furthermore, the investing company could get hold on special economic zones and enjoy special tariffs. They could gather financial subsidies to improve the working environment. Some of them enjoy free land for setting up company and easy loans for renovations.

Different Types of FDI

There are generally two types of FDI, outward FDI and inward FDI. Any investment made by a country in other countries will account for outward FDI. Where as, all the FDIs invested by other countries in that country is called inward FDI.

These two forms account for the net FDI of the country. It could be either positive or negative. Both inward and outward FDIs are regulated by the governments of respective countries.

The FDIs are categorized into vertical and horizontal based on how the subsidiary company works in par with the parent investor.

Vertical FDIs happen when a corporation owns some share of the foreign enterprise. The local enterprise could either be supplying the input or selling finished goods to the parent corporation. The subsidiary here helps the parent company to grow more.

When the MNCs kick off similar business operations in different countries it becomes horizontal Foreign Direct Investment. It is actually a cloning that is happening here. Both the countries enjoy the same share of growth.

How FDI is done?

A foreign country may carry out FDI in different ways depending on the requirement. An investment made by a country can be regarded as FDI is the company acquires 10% of the voting shares of the domestic company.

This could be achieved by incorporating an existing subsidiary or a wholly owned company. Or it could be done by acquiring majority of shares of an associated company.

Some companies go for a merger or acquisition of a completely different company. A few others happen by enrolling in an equity joint venture with other investors or companies. Overall the aim of these is to grab a quick 10% voting power.

Government Imposes Riders on FDI

India is divided when it comes to the question of FDI in retail. The decision by the government to allow FDI into the retail sector brought sharp criticism from the opposition. The question of losing jobs and break down of small business is a sensitive issue and needs to be addressed.

However the government has subjected foreign companies to some restrictions to protect the neighborhood stores. These include a minimum investment of $100 million of which 50% investment done in back-end infrastructure. The companies must also procure 30% of materials from small domestic industries. In addition, the companies can set up shop only in cities with a population of 1 million.

The impact of these policies will take time to show. Till the meantime we can only hope this decision will generate jobs and find alternatives employment opportunities for those who have lost because of this.

(A detailed review of the growth of FDI in India can be found at Department Of Industrial Policy & Promotion website. )

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1. Reserve Bank of India: Its Role and Functions

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Right Time for NRIs to Send Money to India

The rupee is at a 32-month low against the dollar now. It is hovering above Rs. 52 now and some experts predict that it will move towards the Rs. 54 before hitting bottom. It has depreciated about 17% from the early August levels ($1 cost Rs. 44.0749 per Dollar on 1st August 2011).

This means that a NRI who remitted $1000 to her family in India in early August was able to send only around Rs. 44,100. But if she sends the $1000 three months later, when the rupee depreciated to Rs. 52, her family will receive Rs. 52000.

The fall in Rupee is not confined to Dollar alone, but it is depreciating against the Euro, the British Pound, Kuwaiti Dinar and other major currencies. A British Pound can buy you around Rs. 81.40 now, and a Kuwaiti Dinar is around Rs. 187. For NRIs it is high time you send money to your bank in India and benefit from this fall in rupee value.

High Oil Prices and Inflation

Even though Rupee depreciation benefits the NRIs, it is not good for the Indian economy. Pessimism about the growth of Indian economy, rising oil imports, widening current account deficits and reluctance of the RBI to intervene in the markets is contributing to the slide of the rupee.

Depreciating rupee raises the price of imports. Many companies depend on imported material for their production like automobiles, FMCG, tyres, and etc. The producers pass this on to the consumers. This will in turn push up the inflation rate, which is already high at 9.73%(October 2011 prices). Prices of cars, electronics, mobiles and computers will increase if the fall in rupee continues.

But what is going to hit the common man the most will be the rise in cost of petroleum products. Depreciating rupee will make the oil costlier to import. Oil price is already high in India and is fueling inflation. Therefore a further rise in oil prices will adversely affect the Indian economy.

Even though the weakening rupee is benefiting those working abroad, it is not particularly advantageous for the majority of the country. RBI needs to intervene aggressively to stem the fall of rupee. Earlier, when the rupee was around Rs. 51.80 against the dollar, some attempts were made by the RBI to buy dollar. But it is surprising that RBI is reluctant to enter the market at this crucial time.

The government together with the RBI must be pro-active to prevent further fall in rupee. The government must introduce new policies to bring optimism into the market and attract foreign investors. Without such actions our economy will be heading towards bad times, which we are not ready to face.

No related posts.

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Following the recent deregulation of interest rates on savings account by the Reserve Bank of India (RBI), these banks were quick to raise their interest rate on saving accounts. RBI deregulated savings account interest rate from the present 4%, effective from 25th October 2011.

This means that now banks can fix rates of their choice. Surprisingly though, this enthusiasm is not shared by the big banks. But small banks seem determined to take this to their advantage.

Why RBI de-regulate Interest Rates?

So why did the RBI deregulate the savings account? This is a follow up of the economic reforms in the banking sector. By allowing banks to decide on this interest rate, the RBI has paved for better competition in the banking sector. This could also fetch a better deal for the depositors.

Big Banks Offer No Rate Hike

But big banks, like the SBI with a huge depositor base, have decided not to raise the interest rates. For them attracting new customers is not the primary need like smaller banks. Besides, the cost to finance the additional interest would work out to be a huge amount considering the number of depositor they have. For SBI, a 100 bps (basis points) increase in savings rate of their deposits will increase the annual interest expense by Rs. 1400-Rs. 1500 crore for the fiscal.

Also, big banks are confident that their loyal customers won’t be running helter-skelter to open an account with banks that have raised their interest rate. It is a tiresome procedure to switch banks all of a sudden just because of a rate hike. Besides, the increased interest is only going to fetch a meager extra amount, definitely not enough to warrant an immediate change of a banker.

Small Banks to Raise Depositor Base through Competitive Rates

For a small bank, the game is different. They see the recent deregulation in a different light. For them it is an opportunity where big banks see only higher costs. Small banks are scrambling to increase the depositor base. This deregulation gives them an opportunity to attract more customers with competitive rates.

These banks pass on the higher costs to customers. Following the interest rate hike, Kotak Mahindra Bank raised its prime lending rate and base rate. We can also see rise in service charges and transaction charges by these banks to cover the cost to pay the increased interest rate. In the long run this might prove disadvantageous but they can make up for it by providing good customer service.

Initially, most depositors might feel that switching banks is a cumbersome process. But gradually they will realize that transferring an amount to a bank which offers you better rates can be called a prudent investment behavior. Switching banks also have adverse effect on customers’ ability to avail bank loans.

In the near future all banks will be forced to offer higher interest rate on savings account. Banks that are reluctant to raise the interest rates could witness a slow erosion of their customer base to banks that offer high interest.

Anyway, in the short term, big banks will be hesitant to hike the rates. This will offer a golden opportunity to smaller banks to nibble away at the huge depositor base of major banks.

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