The Indian woman is quite possibly among the best money managers in the world. Whether you look at the smallest household in a remote village or an ultra-modern family living in the city, she has always adopted and followed various methods of saving for her family’s needs over generations. From money that is handed to a housewife to manage the household expenses, small portions are cleverly set aside, irrespective of the woman’s knowledge, education or literacy. She is capable of saving money for a contingency or for a need without anyone teaching her the same in a classroom, she just learns it instinctively from her own parents or her financial situation. However, with changing times, despite our cultural reverence for saving, modern Indian women are increasingly prone to financial mistakes. Here are the 10 most common ones; most women would commit a combination of the following mistakes.

1. Leaving all the planning to the man:

In most Indian families, money management is still very male dominated. Either the
man doesn’t want the woman to know everything, or, where the man is more than willing to teach, the woman is unwilling to learn and understand. Because paying bills, tracking the payments, checking from where money needs to be received and how much, doing online payments, dropping off cheques, depositing cheques/cash in the bank, withdrawing cash from the bank/ATM, maintaining records – all this sounds soooo boring!

Can you imagine doing all this yourself if you were alone and there was no one to help you do it? How dumb would you sound if you asked someone – at a not- so-appropriate point in life – how do I make a credit card payment, or how do I pay my electricity bill online? Wake up! Even if you don’t need to do this yourself, you need to be aware of how to do daily transactions. Don’t leave this for tomorrow, understanding banking transactions, making payments physically or online, knowing who owes you how much and how much your family owes someone is important.

2. Not understanding maths:

Most women are reluctant to understand or retool their understanding of basic maths. You can handle basic money transactions when it comes to buying vegetables and paying your parlour bills but when you need to pay your home loan EMI or your taxes, you are scared of seeing complicated figures and refuse to go there and understand even though you can.

Why is this? All you need to do is be patient and understand the workings and the calculations. In the Internet era, things are going to get very fast in terms of money transactions and you need to be able to do your math to understand how much you are paying for a product or service, so you are not duped by anyone. Don’t shy away from refreshing your maths skills, or doing your calculations. Slowly, with practice, you will get faster but if you avoid doing this you will only get worse.

3. Always on the look-out for deals, especially free deals – decision
making starts at the price:

When you go to buy your vegetables, you check them, bargain and go for the best value for money. Why is it that when someone offers you an “ek pe ek” free deal, you lose your sanity and assume this is the best deal by default – just because it’s an offer? Getting the cheapest is not necessarily the wisest thing to do…you can get conned into very big scams, of buying expensive jewellery, a house, expensive insurance policies or white goods if you get taken in by bargain deals. Focusing on smaller things and not looking at the big picture is not always a smart thing to do.

‘Special deals’ are the reason why most women are taken for a ride. For us, everything seems to begin with the price and not with what is the quality of the product. Therefore, men score over us when they can walk into a store and pick the one thing they like the best at the first glance. We ponder, then wonder, and then ponder again. Why should price be the focus when you are clear about what you need? Very often you buy things you don’t need just because there is a deal going on, then you realise later what were you thinking. The salesman or woman knew your weak point about looking out for a bargain and conned you with a hair dryer when you are actually bald!!

4. Inertia, maintaining status quo – not taking out time:

As an extension to not wanting to do anything with money management,
staying put and postponing things that you have to learn to do is a
big issue with women. This will never be on the priority list or it’s always last on the list of things to be done. It doesn’t feel exciting or easy enough to do so you keep pushing it for later and so it never gets done.

5. Not enhancing one’s financial knowledge:

Usually Indians learn the basics about money from their parents. Today’s younger generation need more training on money since we are in a world that’s way ahead in terms of business, economy and
competition. You need to be aware of various concepts of money to be a smart woman of today. This could be through reading, watching some good TV shows or taking help from a certified financial planner.

6. To think you know everything:

Today’s women who are well educated i.e. are either CAs or MBAs or are well-placed in good jobs or run their own businesses – think they know it all. I have come across many women who are unwilling to listen to others and understand what costly mistakes they are making with money, large portions of it belonging to their respective families. They feel they know it all and they don’t need to listen to others who are professionals in the business of managing money to consider their choices.

Professional, seemingly savvy women and the rest who don’t claim to know much, are equally vulnerable to acting on tips, wrong advice from all and sundry – right from your friendly neighbour to your broker to your insurance agent. This could lead to a huge hole in your pocket. It’s always wise to hire a good professional Certified Financial Planner, pay a fee and get good unbiased advice. No advise comes for free. Remember the advice offered for free is coming from those making money out of you without your being aware about how much you are paying them!

7. Making an expense budget but not a savings budget:

We have been taught how to write down our expenses and keep a watch on the same month to month. The idea being to know if you are over-shooting your expenses in a particular month, when compared to the rest of the year. So you may save some money in a month and you may fall short the next month.
The better way to manage your budget is to decide how much you wish to save from your monthly income. Fix a percentage of the same. Say you get Rs. 10000 per month you decide to save 25% every month. So you save Rs. 2500 and spend only Rs. 7500 per month. You need to figure how much is the percentage you wish to and can comfortably save every month for the future. This automatically curbs additional expenses and also helps you save for emergencies and other specific needs for the future. The best way to do this is through SIPs systematic investment plans where the money gets automatically debited from your bank account at the beginning of the month as soon as you receive it.

8. Rather spend than save for the future – live for today:

This is a common feature of the younger ‘moneyed’ generation. Women who earn well are living well for just today and do not care about tomorrow. They would rather have all the latest gizmos, gadgets and consumables than derive value out of their acquisition till it gets a little old. Envying the neighbour and getting the latest before she gets it has become a fad. This only burns a deeper hole in your pocket. It will not help you get that really dear thing you plan for later in life.

9. Someone else will provide for me – why be financially independent?

To live on one’s own, to provide for one’s needs, is a thing of today. Most women don’t plan at all for tomorrow. They think either their parents or brother or spouse and then their kids would look after them for the rest of their lives. They don’t believe in wanting to contribute to the family corpus that would be needed especially for their old age and health. This is a huge mistake. To follow one’s passion, to do what one really derives happiness and satisfaction from should eventually help you in earning for your needs and dreams of the future.

10. Not being aware of the need for financial planning:

Each and everyone needs to plan for their financial future. You need to list down goals that you wish to achieve in life. For example, I need to buy a car worth Rs. 4 lacs in 2015. Quantify your goals. Write down the year you need it. Then you can start working towards saving for it. Keep on revisiting and revising your goals, tick them when they are done and you will feel a sense of achievement beyond anything since you did it with your money.

Click on these links for previous posts on understanding the need for financial planning, analysing your income and expenses, and creating your household budget.

More about Chitra:
Chitra Iyer has a range of diverse experiences in the field of finance, with close-to a decade in Financial Planning as the Chief Operations Officer and Financial Coach of My Financial Advisor. She has previously worked as a consultant for Development Credit Bank, and has also been into investment and merchant banking.

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Amar Pandit

The introduction of General Anti-Avoidance Rules (GAAR) in budget 2012-13 has set off the proverbial storm in a teacup. Foreign investors, who will be primarily affected by this rule, are up in arms, and are lobbying furiously with the Finance Ministry for its withdrawal. So far the latter has refused to budge on the essentials, though it has promised to soften the rules so that honest investors are not unduly harassed by the tax man.

What is GAAR and why has it perturbed FIIs so much? India has a Double Taxation Avoidance Agreement (DTAA) with countries such as Mauritius and Singapore. A large number (by some estimates, as much as 50 per cent) of FIIs have until now routed their investments via Mauritius in order to avoid paying taxes on their investments in India. This status is now threatened by GAAR.

According to GAAR, you can avail of tax benefit (by investing via a DTAA country) only if you have “substance” in that country. What does “substance” mean? Though this has yet to be spelled out clearly, in all likelihood it means that the foreign investor should have a full-fledged operation in that country. In other words, the corpus for the fund should have been raised in that country, and its analysts and fund managers should reside there. It should not have only, what is being called, a “post-office box” operation in that country, meaning that the corpus is raised elsewhere, the fund managers and analysts reside elsewhere, but the foreign institutional investor (FII) routes its investments into India through that country to avail of tax benefits. The term used to refer to such a set-up is “impermissible arrangement”.

A few concessions granted

After FIIs put forth their point of view, the Finance Ministry (according to news reports) has agreed to soften some of the provisions of GAAR. The budget document had said that the onus for proving innocence would be on the taxpayer (in this case, FIIs). In other words, the taxpayer would be presumed guilty of being in an impermissible arrangement unless he was able to prove his innocence. This would be a rather draconian provision and could lead to undue harassment of foreign investors by the tax authorities. The Finance Ministry has now agreed to shift the onus for proving guilt to the assessing officer from the tax department.

Two, the Finance Ministry has assured FIIs that GAAR will apply only from assessment year 2013-14 and not retrospectively.

Three, even if an impermissible arrangement exists, if the FII pays the capital gains tax that is due, he will not be punished further with a penalty or interest charge.

Moreover, if an assessing officer comes upon, what in his opinion, is an impermissible arrangement, he will have to refer the case to a commissioner. The latter will hear the taxpayer’s viewpoint, and if he finds it unsatisfactory, will refer the case to an approving panel. Normally this panel comprises tax officers of the rank of commissioner and above. To make its composition more broad-based, the finance ministry is reported to be thinking of including a member from the judiciary as well. So a due process will be followed.

The FII response

FIIs argue that if they have to pay a 20 per cent tax on short-term capital gains (India does not tax long-term capital gains), then India will no longer be such an attractive investment destination for them, especially against the backdrop of a depreciating rupee (which erodes FIIs’ returns further).

But every country, at some stage in the evolution of its tax regime, implements GAAR. So after the short-term hue and cry ends, FIIs will either have to accept the new regime or find a way to circumvent it. Many foreign investors are already planning to set up a base in Singapore. If they must have operations on the ground, they would rather have it in a well-developed financial hub. But merely shifting base to Singapore will not do. To avail of the DTAA between Singapore and India and avoid GAAR, they will have to demonstrate that they have had operations on the ground for at least two years in that country, and that they have incurred at least $200,000 per annum in operational expenses in that country for two consecutive years.

Morality versus realpolitik

India is very much within its sovereign rights to tax FIIs on capital gains. There is nothing morally wrong or underhanded about what it has done. After all, if its own citizens pay taxes on short-term capital gains, why shouldn’t foreigners?

In any case, GAAR was part of the Direct Tax Code (DTC) and would have come into force once the latter got implemented. All that the finance minister has done is implement GAAR ahead of the rest of DTC.

The more pertinent question is whether India will be able to get away with its implementation. Nowadays the country has a persistent current account deficit (expected to be in the range of 3 per cent of GDP this year). Foreign inflows act as the life-support fluid that helps the country fund this deficit. The situation is so bad that even if foreign inflows slow down marginally during a month or quarter, the rupee begins to slide. If the implementation of GAAR leads to a slowdown in inflows (and, heaven forbid, causes outflows), the finance minister may well rue his decision to implement this scheme for rustling up more revenues for the government.

But first let us examine Goldman Sachs’ reasons for the upgrade. Its analysts argue that the European problems that had weighed heavily on the Indian markets have abated. The month of March has gone by without inflicting much damage: while the Congress Party’s performance in the state elections was disappointing, at least the budget was neutral vis-à-vis the markets. Moreover, Goldman’s analysts derive optimism from the fact that core inflation is softening. They also expect domestic growth to revive in the second half of the calendar year. They have also suggested that as the year progresses earnings estimates for 2013 could get revised upward. And finally, they argue that current valuations are attractive compared to the 10-year average of the MSCI India index.

Many a slip…

No doubt the magnitude of the headwinds that affected the Indian economy and markets in 2011 has abated. But currently the glass is half full at best.

Rate cuts. After thebudget, the market is now hinging its hopes on interest rate cuts by the central bank. Rate cuts could well begin in April, but owing to inflation (which has abated but is not yet in RBI’s comfort zone), and inadequate reining in of the deficit and government spending in the budget, the quantum of rate cuts is likely to be limited. Economists at Citi, for instance, expect rate cuts of at best 50-75 basis points (bps) in 2012. After that, whether the RBI is able to undertake more cuts will depend on where oil prices are headed, and whether the government has undertaken credible measures to rein in the fiscal deficit (read, raised fuel prices).

Iran oil crisis. The price of crude oil remains elevated owing to the stand-off between Israel and the West on one side and Iran on the other over the latter’s pursuit of a nuclear programme. If the crisis escalates and the average price of oil rises to $125 per barrel in FY13, as many economists think could happen, that would spell disaster for India which imports 80 per cent of its oil needs. Oil comprises 30 per cent of India’s total import bill and a one dollar per barrel increase in its price raises its trade deficit by $800 million. Even at current price levels, the government has under-budgeted for oil subsidy. If prices rise, both the current account deficit and the fiscal deficit would balloon. Inflation would soar again, rendering rate cuts by the central bank difficult.

Rupee under pressure. Indiarequires massive portfolio inflows to fund its current account deficit (which stood at 4.3 per cent of GDP in Q3FY12). When these flows flag even a little, the rupee comes under pressure. This has happened again in March. In January and February portfolio inflows were of the magnitude of $6 billion each. But with portfolio flows slowing down in March, the rupee has depreciated to around 51 to the dollar.

A depreciating rupee affects foreign investors’ dollar returns and makes them negatively disposed towards the Indian markets.

Insufficient cut in fiscal deficit and high borrowings. In the budget, the Finance Minister projected a fiscal deficit target of 5.1 per cent for FY13. Though this target is more realistic than last year’s 4.6 per cent, it may not be achieved. Besides having budgeted too little for fuel subsidies, the government may also have over-estimated the revenue it is likely to earn from re-auctioning of telecom spectrum and from disinvestment. If the government overshoots the fiscal deficit limit, it could invite a cut in its sovereign rating, which would again affect foreign investments. Furthermore, since a high government deficit is inflationary, it will make rate cuts by the RBI more difficult.

The government’s borrowings, as indicated in the budget, will also not come down in FY13. This will prevent long-term rates from softening and will crowd out private borrowing. This could further postpone the much-needed revival in private investment.

Major reforms unlikely. Many of the UPA’s own allies, such as the Trinamool Congress, oppose key reforms. The UPA’s lack of majority in the Rajya Sabha is another impediment. Furthermore, the Congress Party’s recent losses in state elections may make it more cautious, and prevent it from attempting contentious reforms.

European problems may flare up again. In the fourthquarter of 2012, theIndian market was most closely correlated with the movement of Italian sovereign bond yields: the market fell as yields soared. It underperformed because several Indian firms have borrowed from European banks (which were in difficulties and could well have called in their loans).

Currentlythe euro zone’ssovereign debt problemhasabated after the European Central Bank (ECB) injected more than 1 trillion euros. But the problem could flare up again, especially in Portugal and Spain. Austerity programmes being implemented in the euro zone are bound to affect growth, and hence the revenue earnings of governments. This will make it more difficult for these governments to find their way out of the debt crisis.

A resurgence of the problems in the euro zone could once again create a risk-off environment and lead to outflows from emerging markets, including India.

Recovery in the US. If theUS clocks robust growth (2.5 per cent expected in 2012 vis-à-vis 1.7 per cent in 2011), it could lead to outflows from EMs (especially India which is mired in domestic problems) and into the US market.

A few positives

China slowdown. China’s growth rateis expected to slow down from 9-10 per cent in the recent past to 7.5-8 per cent in 2012. If the world’s biggest consumer of commodities slows down, commodity prices could soften. This would be a big positive for a commodity importer like India.

Policymaking initiatives. ThoughtheFinance Minister did not announce any big reforms in the budget, he did try to support investment in infrastructure, energy and the power sector by taking steps that would make more funds available to them and by offering tax concessions.

Another positive is the recent steps taken by the Committee of Secretaries, headed by the principal secretary to the Prime Minister, to remove bottlenecks that are affecting investments in core sectors. The Committee has proposed fast-track clearances for power and coal projects and expansion of production by existing mines without requiring fresh clearances. It has also instructed Coal India to sign fuel supply agreements with power plants that have entered into power purchase agreements. With the PMO now spearheading this initiative, the impediments affecting investments in core infrastructure sectors might well get removed.

More monetary easing by ECB. Given the scale of problems in the EU, the ECB’s 1 trillion euro LTRO programme may have to be supplemented with further doses of liquidity injection (possibly by mid-2012). This would whet risk appetite and support equity markets in emerging markets including India.

Notwithstanding Goldman Sachs’ positive prognosis, we would advise patience and caution. However, this should not be interpreted to mean that you should stay away from the equity markets. In fact, times such as these are good for ploughing money that you will not need for the next five years into equity markets.

Interpreting ting macro-economic data: Three key pieces of economic data, their significance, and points to keep in mind while deriving conclusions from them

BY AMAR PANDIT, CEO – MY FINANCIAL ADVISOR

A savvy investor should be able to understand macro-economic developments. To do so, he must be able to interpret economic data, which signal changes in the economic environment. Remember that these developments affect the value of your portfolio. The stock market doesn’t just discount sentiments; it reflects macro-economic fundamentals too. Let us try to understand three pieces of data – the Wholesale Price Index (WPI), the Index of Industrial Production (IIP), and the Purchasing Managers’ Index (PMI) – that appear every month.

Wholesale Price Index 

InIndiawe use the WPI as the key measure of inflation (unlike a lot of countries that give primacy to the consumer price index or CPI). The WPI index has been created using a representative basket of 676 goods. The base year for this index currently is 2004-05 (revised forward from 1993-94). The WPI reflects the changes in the prices of wholesale goods (which are traded between corporations) and not consumer goods (which are bought and sold by consumers). WPI is the preferred measure of inflation inIndiabecause it uses a wider range of goods and is computed on an all-India basis.

The WPI index is also important because the Reserve Bank of India (RBI) takes it into account while deciding whether to cut or raise interest rates. Besides looking at headline inflation, the central bank also takes a close look at non-food manufactured inflation, or core inflation (which is inflation excluding the prices of volatile commodities such as food and oil).

Moreover, looking below the headline number at the disaggregated figures (primary articles, food, fuels, non-food manufacturing) will provide you a better picture of what is causing inflation. For instance, in January WPI inflation was 6.6 per cent and the latest number for February has come in at 7 per cent. Does this indicate that inflation is re-accelerating? Not quite. Vegetable price inflation had declined excessively year-on-year in January (-43.1 per cent). In February it was back to a more normal level of 1.5 per cent y-o-y. If you remove vegetable prices from the picture, then inflation momentum is still moderating.

Another related aspect about inflation inIndiathat has to be kept in mind is suppressed inflation. Inflation in some commodities, such as crude, is not automatically passed on to consumers. This poses a threat. With crude prices rising in recent times, and given the bloated state of the fiscal deficit, the government cannot continue to subsidise petroleum products beyond a point. Therefore, a revision in their prices appears imminent. If and when prices of petroleum products are revised, inflationary pressures will rise within the economy.

Index of Industrial Production

The IIP tells you whether industrial production within the country is expanding or contracting. Production figures are collected from 700 industries. The base year for the current index is 2004-05. The three main industry groups have the following weights within the IIP: manufacturing (75.5 per cent), mining (14.2 per cent) and electricity (10.3 per cent).

The figure that is widely quoted for IIP (6.8 per cent in January 2012) is the year-on-year percentage change for that month. It comes out with a lag of six weeks, so the January IIP figure came out in mid-March. This figure is a quick estimate. A revised estimate appears a month later.

Volatility and unreliability of data. In recent times, there have been a lot of complaints about volatility in IIP figures (down one month, up the next). No less a person than RBI governor D. Subbarao has lamented that it becomes difficult to carry out policy-making in real time when the data on which such decisions have to be based is flawed. He cited the example of the period between December 2008 and June 2009 when the global financial crisis was at its peak. According to the data available then, IIP was positive. This was contrary to RBI’s assessment that industrial production was decelerating on account of the crisis. When the new series with base year 2004-05 came out later, it showed deceleration in industrial production during that period. Policy-making indeed becomes difficult when important decisions (such as whether to cut interest rates) have to be based on unreliable data.

The reasons for poor-quality data are two-fold. One, the data series may become outmoded. As time goes by, some industries become bigger and more important while others languish. Therefore, the weights assigned to them in the index no longer reflect the reality and need to be revised. New industries that have risen to prominence also need to be incorporated in the index. Already there is talk of revising the 2004-05 series to a new one with base year of 2009-10.

A bigger problem (this is endemic to all developing nations but is more pronounced inIndia) lies in the quality of data that is collected. Data is collected from a large number of industries under administrative arrangements. Ensuring accuracy and timeliness of reporting is a big challenge.

For the moment, since we have to go by the data that we have, one should not rely on a single month’s data. Look at several months’ figures before arriving at a conclusion about whether a certain trend is emerging (currently, for instance, the big question is whether the slowdown in industrial production is behind us).

Another point to remember about both the WPI and the IIP is that both give year-on-year percentage change for a given month. Hence, both are subject to base effect. If the base was high last year (for a given month), it would mask the inflation figure for this year, even though in absolute terms inflation may still be high.

Purchasing Managers’ Index

A third figure that gives an idea of whether the economy is growing or contracting is the Purchasing Managers Index. Actually there are three PMIs – manufacturing PMI, service PMI and a composite PMI. InIndiathese numbers are brought out by HSBC and a research agency called Markit.

The point to remember about the PMI is that it is a leading indicator. An expansion in the manufacturing PMI signals that industrial growth will accelerate in future. Another point to note is that a PMI above 50 indicates expansion, while a figure below 50 indicates contraction.

Having read this primer, I hope you will have an easier time interpreting economic data and understanding the emerging macro-economic scenario.

Intro: What the Finance Minister has given with one hand in the form of lower income tax burden, he has more than taken away by hiking indirect tax rates

In this budget the Finance Minister had to deal with the task of reining in a runaway fiscal deficit. So he has indulged in some jugglery. While he has offered some concessions to the salaried class on income tax, he has raised indirect taxes (both excise duty and service tax), which will have a cascading effect on the prices of a wide range of goods and services and adversely affect everyone’s wallet.

Income tax burden reduced

As is customary every year, the Finance Minister offered some tax concession to the salaried tax payer. He raised the minimum tax exemption limit from Rs 1.8 lakh to Rs 2 lakh. This will put an additional Rs 2,060 into every tax payer’s pocket.

The bigger benefit, however, goes to the upper middle-class tax payer. The 20 per cent tax bracket has been widened from Rs 5-8 lakh earlier to Rs 5-10 lakh now. This will provide a generous windfall of Rs 20,600 to those whose net taxable income is above Rs 8 lakh. Together with the benefit from the raising of the minimum exemption limit, people who earn in excess of Rs 8 lakh will be able to save Rs 22,600 on income tax.

From the financial planning perspective, one would suggest that you should not squander this windfall. Invest it for the long term so that it goes towards meeting one of your important financial goals.

Attracting new investors into equity markets

In this budget the government launched a scheme, the Rajiv Gandhi Equity Savings Scheme, which for the first time offers a tax incentive on direct investment in the equity markets. If you are a new investor whose income is less than Rs 10 lakh, you may invest up to Rs 50,000 in equities and enjoy a tax deduction of 50 per cent. This scheme carries a lock-in of three years.

The scheme has been implemented to encourage retail participation in the equity markets. Typically, owing to volatility retail investors shy away from equities, preferring to put their money in real estate, gold and fixed-income instruments. Despite a total population of 1.17 billion, only about 20 million people have demat accounts in this country. Among those with an income of Rs 2 lakh to Rs 10 lakh, about 1.5 crore PAN card holders do not have a demat account. It is no wonder that after the announcement of this scheme, brokers are salivating at the potential new business they might get (= 1.5 crore * Rs 50,000 = Rs 75,000 crore).

The government has taken this step in order to reduce the Indian stock markets’ dependence on foreign institutional investors (FII), and replace their funds with a more stable domestic source (the lock-in will ensure stability).

In India tax benefits play a big part in the success of a financial instrument. Hence, there will be many takers for this scheme. However, one wonders how prudent it is to allow first-time equity investors to enter the markets directly. Wouldn’t it be better if this benefit is extended to investments via mutual funds where there is a trained fund manager to pick stocks on the investor’s behalf?

If you are a new investor who intends to avail of the tax benefits of this scheme, choose your stocks after doing the due diligence yourself or after getting advice from a trustworthy source.

Tax deduction on interest from savings account

The Finance Minister has also proposed a deduction of up to Rs. 10,000 on interest income from savings bank account under the newly proposed Section 80TTA. Earlier, interest income was added to your salary and taxed at the marginal income tax rate. Besides the tax saving, another benefit of this provision will be that a person whose taxable income is less than Rs 5 lakh will not have to file tax return. (A lot of people could not avail of this benefit because they received an interest income from their savings account that was taxable.)

Tempering gold lust

The Finance Minister doubled the custom duty on gold and platinum from 2 per cent to 4 per cent. This will make gold more expensive.

In recent times, high gold import (along with that of crude and other commodities) has been one of the factors that led to the widening of the current account deficit. By raising the demand for dollars, high gold imports exert downward pressure on the rupee. The finance minister hopes to reduce gold imports by making it more expensive.

The risk in this measure is that it could encourage smuggling of the yellow metal.

A more innovative way of weaning Indian investors away from gold would have been to launch inflation-protected bonds, as are available in the US (called Treasury Inflation Protected Securities or TIPS).

Reduction in STT

The securities transaction tax (STT) has been reduced by 20 per cent from 0.125 per cent to 0.1 per cent. This will lower the cost of equity transactions. However, the reduced rate can be availed only on cash delivery-based transactions. The majority of transactions in the stock markets are not delivery-based.

In pre-budget discussions with Finance Ministry officials, market players had asked for a complete abolition of STT or at least a 50 per cent reduction on all transactions.

Conceptually it is a good step as it encourages delivery-based trading and hence perhaps buy-and-hold type investments.

However, the impact of this move will get nullified by the higher service tax that brokers will charge from investors.

Impact of hike in excise duty and service tax

The government has increased the excise duty by 2 percentage points from 10 per cent to 12 per cent. This will make a host of goods more expensive (see box). It will also put more pressure on the manufacturing sector, which is already languishing under the burden of high interest rates and high input costs.

The service tax rate has also been hiked from 10 per cent to 12 per cent. Besides hiking the rate, the government has widened the list of services from which this tax will be levied by introducing a negative list. Hereafter, only the 17 services mentioned in the negative list will be exempt from service tax.

Both the hike in the excise duty and service tax will prove inflationary by making a wide range of goods and services more expensive.

Impact on rate cuts

RBI governor D Subbarao has said that high government expenditure has proved inflationary, and that he would take his cues from the budget while deciding whether to cut rates (a reduction in government expenditure would expedite rate cuts). Rate cuts, as we know, are crucial for setting off the virtuous cycle of growth revival, improved corporate earnings, and improved valuations of the equities and bonds lying in your portfolio.

Has the desired cut in government expenditure happened? No. The aggregate expenditure budgeted for next year (Rs 19,90,925 crore) is 18 per cent higher than the budgeted estimate for last year and could keep inflationary pressures alive. This could delay rate cuts or lead to a lower aggregate quantum of cuts during the year.

In view of the hike in indirect tax rates and the lack of a firm commitment from the government to reduce its expenditure, it is difficult to say unequivocally that this budget will have a net positive impact on your personal finances.

BOX

Goods that will become costlier due to hike in excise duty

-Goods that will become costlier due to hike in excise duty
-Two-wheelers, cars, commercial vehicles
-Refrigerators, air conditioners, washing machines, watches
-Soaps, cosmetics, home care items
-Cigarettes and bidis
-Packaged food items
-Pan masala and chewing tobacco
-Unbranded precious metal jewellery
-Imported luxury vehicles
-Imported bicycles and bicycle parts
-Imported digital still cameras
-Imported gold bars and coins, platinum
-Imported cut and polished coloured gemstones
-Travel, eating out at restaurants, and hotel stays

The budget and your wallet: A look at how this year’s annual budget could affect your personal finances

Amar Pandit

This year’s budget comes against a difficult economic environment of high fiscal deficit (could come in anywhere between 5.6-6 per cent for FY12); high inflation for the past two years, which has shown signs of softening in 2012 but could spike again if crude oil prices remain high; slowing economic growth (third quarter GDP growth came in at a low 6.1 per cent); and problems in Europe that have been eased temporarily due to injection of liquidity by the European Central Bank (ECB) but have by no means been resolved. Let us turn to what is expected from the Finance Minister (FM) on March 16 and what impact his measures could have on your personal finances. In some cases, the impact of his actions will be direct, and in others, indirect.

Lowering of fiscal deficit

It is expected that this budget’s primary focus will be on reining in the runaway fiscal deficit. A high fiscal deficit is inflationary because it implies that the government is spending a lot of money. (This government has spent enormous sums on social welfare programmes targeting rural areas.) When a lot of money chases a limited quantity of goods, inflation rises. If in this budget the government decides to reduce its expenditure, or at least not raise it further, it could help ease inflationary pressures.

When a government runs up a high deficit, it also borrows more from the markets. This prevents interest rates from softening. Borrowings by private corporates get crowded out of the market. If corporates can’t borrow adequately, then private investment will not revive. Today economists are unanimous in their view that reviving private investment is a sine qua non for raising the economic growth. If the private sector does not undertake infrastructure projects and develop new manufacturing capacity, there will be an adverse impact on employment, wages and even prices (due to supply bottlenecks).

The government’s zeal to curb its fiscal deficit could also have another, more negative impact on your wallet. If it decides to reduce its subsidy bill on petroleum products, it will hike the prices of products such as petrol, diesel, and liquefied petroleum gas (LPG). This will drive your monthly household expenditure up. The only way out will be to adopt stringent conservation practices.

By increasing the cost of transportation, higher fuel prices could also have a cascading effect on the prices of a wide range of goods.

On the positive side, if in this budget the government makes a serious and credible effort to keep its deficit in check, it would help rein in inflation (be warned: rising oil prices could play spoilsport). The central bank would then feel more comfortable about the inflation threat and would begin to cut rates. Rate cuts have an invigorating effect on both the economy and the markets. Not only will they boost investment and consumption, they will also give a fillip to equity and bond valuations (hence your investment portfolio will register gains).

Relief on the direct tax front

Every year the part of the budget that is most eagerly anticipated is whether the FM will provide relief on individual income tax. And normally FMs don’t like to disappoint. This year too you may have some tinkering of tax slabs and increase in the tax exemption limit in order to leave more disposable income in peoples’ hands. Media speculation has it that the minimum threshold for imposing income tax could be raised from Rs 1.8 lakh currently to Rs 3 lakh. The limit on deduction via investment in tax-saving instruments could also be raised from Rs 1.2 lakh to Rs 2.5 lakh.

To encourage the raising of long-term funds for infrastructure projects, the government had in the last budget announced tax exemption of Rs 20,000 under Section 80CCF on investment in infrastructure bonds. Subsequently, institutions such as NHAI and REC were able to raise large sums from the public. It is being hoped that in this budget the limit may be raised to Rs 50,000.

In reality, all these reports are entirely speculative. More than in any other year, this year (owing to the poor state of government finances) the finance minister will be loath to forgo any revenue. Therefore, temper your expectations regarding tax concessions.

Excise duty and service tax may be raised

Both the service tax rate and the excise duty had been cut to 10 per cent in the wake of the global financial crisis as part of the government’s stimulus package. It is being speculated that the government may raise both from 10 per cent to 12 per cent.

Hiking of excise duty will make manufactured goods more expensive.

In case of the service tax, the government may also widen the tax net. From a positive list, wherein only the services mentioned in the list are taxed, it may move to a negative list. It implies that only the services specifically mentioned in the negative list will not be taxed. This would lead to a wider range of services falling within the tax net.

Since the producers of these services will inevitably pass on this burden to customers, a range of services may get costlier after the budget.

Diesel cars may turn costlier

Due to the disparity between the prices of petrol and diesel, a lot of people opt for diesel cars. With crude oil prices rising, under-recoveries from diesel have ballooned. There is a possibility that the government may impose a stiff duty on diesel cars.

A regulator for the real estate sector

One sector that every urban dweller will have to deal with at least once in his lifetime is real estate, which is also perhaps the most poorly governed. There is speculation that in this budget the FM may announce the setting up of a regulator for this sector. This is a much-awaited development. It will translate into tighter regulation of entities such as developers and real estate agents. Customers will have recourse to an authority that will focus entirely on the grievances of real estate buyers (unlike, say, consumer courts, which have to deal with a wide variety of cases).

Again, because of the government’s straitened finances, it may not raise the tax deduction limit either on principal or interest repaid on home loan. But one cannot rule out some concessions to the budget housing segment, say, in the form of extension of the interest subvention scheme.

So keep your fingers crossed and hope that the FM gives you a good deal on budget day.

Iran-West stand-off
The on-going stand-off between Iran on the one side and Israel and the Western powers on the other over the former’s pursuit of a nuclear programme threatens to disrupt oil supplies from OPEC’s second-largest oil exporter, and could result in a sharp escalation in oil prices. Israel has threatened to attack Iran’s nuclear installations. The US and other Western countries have imposed trade sanctions. The 27-member European Union (EU) has decided to impose an embargo on oil imports from Iran beginning July. Iran has retaliated by threatening to cut off supplies to six European nations: Italy, Spain, France, the Netherlands, Greece and Portugal. It has also said it will block traffic passing through the Strait of Hormuz, a 21-km wide (at its narrowest) waterway through which 1.7 million barrels of oil pass each day from Middle East suppliers to countries all over the world.
Owing to this sabre rattling, global oil prices have risen to their highest level since 2008: Brent Crude is now within sniffing distance of the $130 per barrel mark.
With global growth expected to be weak this year (3.25 per cent, according to the International Monetary Fund’s projection), the price of oil (and other commodities) was expected to be soft this year. But the Iranian crisis has extinguished those hopes.
India, which imports about 80 per cent of its oil requirements, will pay a price not because oil supplies from Iran will be affected. India does not support the sanctions and plans to continue importing crude from Iran. But higher prices will translate into a higher oil import bill for the country, from an already bloated $106 billion (FY11 figure) annually.
ECB’s QE may stoke inflation
Between December 2011 and February 2012, the European Central Bank (ECB) has lent about $1.2 trillion to banks in Europe (a figure comparable to the Fed’s twin quantitative easing or QE programmes). The correlation between quantitative easing and high commodity prices (especially in the case of commodities such as oil where the supply-demand dynamic is tight) is well documented. A QE programme, by making cheap money available to investors and whetting their risk appetite, causes a run-up in the stock markets – as has already been witnessed in early 2012. But once commodity prices begin to rise and inflation rears its head, the market tends to stall (especially in the case of a commodity-importing country such as India).
Negative impact on economic fundamentals
These two factors – standoff with Iran and quantitative easing by ECB – could keep oil prices on the boil and worsen India’s already weak economic fundamentals.
Current deficit. Owing to faltering exports but high imports, India is expected to end FY12 with a record high current account deficit of around 3.5 per cent (of GDP), a level not touched in the past 12 years. If the oil import bill soars, its current account deficit could widen further in FY13.
Fiscal deficit. Since the government does not allow automatic pass-through of high crude prices to consumers, rising crude prices do not affect consumers immediately. Instead they wreak havoc on the government’s finances. An increase of one dollar in the price of crude raises the country’s subsidy burden by Rs 7,000 crore a year.
In FY12 the centre’s fiscal deficit would range anywhere between 5.5-6 per cent, depending on the average price of oil for the year. A high fiscal deficit forces the government to borrow more from the market. Besides preventing interest rates from softening, high government borrowings also crowd out private borrowings. And if this happens, private investment will not revive, and industrial growth will remain low.
Interest rates. If crude prices soar, instead of the expected decline to the 6-7 per cent level, WPI could once again move up. In the face of high inflation, the central bank would find it impossible to cut interest rates despite growing growth-related concerns.
The rupee. The rupee has gained 8.31 per cent this year due to robust foreign portfolio inflows after falling about 16 per cent in 2011. When the price of crude rises, oil refiners need more dollars, and this puts pressure on the rupee. Weakening portfolio inflows would also cause the rupee to decline.
A vicious cycle could then set in: foreign portfolio inflows would peter out due to weak fundamentals, causing the rupee to decline. And a declining rupee would scare foreign investors further away since their dollar returns on investments would get negatively affected.
Corporate bottomlines. High raw materials prices and high interest costs have already dented corporate margins in 2011. If these input costs don’t decline, the expected improvement in corporate earnings will not materialise.
Stock markets. The current rally is being driven by liquidity flows from abroad and low valuations in India. But for it to sustain corporate earnings need to improve. As mentioned, high crude prices (and that of other commodities) would act as the proverbial spanner in the works.
In recent years, oil price spikes have become a recurrent feature – either due to geo-political tensions in the Middle East or due to quantitative easing by Western central banks. India needs to urgently get its energy-related policies right.

With loans taking longer to be disbursed, getting a home in the US, even for an American with a good credit history, has become difficult

I was in the US a couple of weeks back and met a lot of professionals in the financial advisory space. A lot of financial professionals that I spoke with talked about hiring freezes in most banks and financial institutions. It was also surprising to see that many financial advisers were talking about increasing investment allocation in India.

In the US today, getting a home loan has become difficult for an American even with a good credit history. Loans are taking longer to be disbursed and one could witness a clear slowdown in the banking and financial services, real estate and auto space. On the other hand, when I went to an Apple store (a similar scene is witnessed day in and day out at most Apple stores), there was no place to stand and the counters were buzzing with orders. A similar scene was witnessed at Cheesecake Factory​, a restaurant chain with restaurant sizes in the range of 8,000-15,000 sq. ft. There is a waiting time of 30 minutes in such large format restaurants. The point is that there are certain sectors in the US that are doing extremely well and you can see this from the cash piles on the balance sheet of many US companies. Though there would be a continuation of the slowdown in several sectors, the US economy may not pose a big threat to the world as yet.

The thing that is really worrisome is the health of some European countries. Germany and 12 other countries (out of 17 countries in the Euro zone) passed a €440 billion EFSF (European Financial Stability Facility) fund to make precautionary loans, help recapitalize banks and buy distressed countries’ bonds in the secondary market. The sentiment still looks negative in Europe and some countries such as Italy and Spain could spell trouble for Europe and the world in general.

Domestically, the central government’s fiscal deficit surged nearly two-fold to Rs. 2.7 trillion during the first five months of the current fiscal due to low revenue realization compared with Rs. 1.5 trillion in April-August 2010. This is much above the government’s budget estimate and could worsen sentiments among global investor, who have been net sellers in the Indian market in 2011 (they have been net buyers in some months buying billions of dollars).

Going into October, quarterly results will be the key numbers to look out for. However, domestically looking at the advance tax number, the top 100 companies rose a modest 9.9% in the second quarter ended September 2011 compared with 19% growth in the first quarter ended June 2011 (suggesting that corporate profit growth is likely to be muted in the second quarter of FY12).

Investment strategy

The equity market continued to be extremely volatile in September 2011. Looking at the global scenario and economic data, markets will be very challenging in the short run. In short, a downside of 15% cannot be ruled out from the current levels.

The general advice would be to buy the dips, which would make sense from a long-term perspective. However, you have to live the short term and an equity investor has to demonstrate emotional strength to ignore the short-term red on investments. Hence, a prudent strategy would be to go slow in making one-time investments in equity and invest primarily through systematic investment plans (SIPs) and DIPs (one time investments on days when the market fall). This has been one of the best strategies to capitalize on the market volatility. These are times when one must have cash to take advantage of extreme opportunities that might come by.

Valuations today are excellent for equity investments but they could get even better in the short run. The current sell-off has got nothing to do with India but it’s about Europe and the perceived risks to the global economy. Investments made during such times will return abnormal returns in the next few years but one could see red in the short term. Hence go slow and the best way is to buy quality investments at low levels and hold on till target prices are reached or till your financial goals are reached or if the investment starts underperforming.

Conservative investors should exit certain equity investments (where fundamentals have deteriorated) and increase exposure to debt and gold. Every rise can be utilized to exit such investments.

Amar Pandit is CEO, My Financial Advisor, a financial planning firm.

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Spot and plug the little leaks that are draining you of your wealth

Arjun Nair, an advertising industry executive in his late 40s, has been suffering from what I call the ‘Financial Leakage Syndrome’. Although he earns an enviable INR 24 lakh per year, post tax, he finds it difficult to save a single penny. His argument: “Life has become so expensive, plus these taxes and loan EMIs are killing me”. His wife, Deepa, however disagrees with Arjun and says that this has been the case for the past 20 years of their marriage. She strongly felt that they could save much more as a family. I agree with Deepa and believe that there are several ways in which they could have cut down on their financial leakages.

The starting point was to look at the monthly inflows and outflows of the Nair family. Overall, things looked fine. There were common expenses such as home loan EMI, daughter’s college and tuition fees, groceries, transportation, utility, entertainment and vacation. But when we drilled down further, we found that his branded alcohol and cigarette intake was costing him around INR 2 – 3 lakh per year. His monthly alcohol intake was costing him around INR 14,000 [which included occasional consumption in restaurants] and cigarettes around INR 4,000 per month. Besides this, they ate out twice a week on an average, which cost them INR 2,500 per week. Three visits to a multiplex in a month clubbed with shopping cost another INR 10,000. It doesn’t seem much on the surface, but add the numbers and it comes to INR 30,500 per month. This is excluding the vacation and other lifestyle expenses of the family.

Let us see how much he could save if he plugged some of the leaks.

A pack of branded cigarettes costs around INR 100 today. A 50 per cent cut in consumption, is not only good for one’s health, but also helps build a corpus. Similarly, a 180 ml bottle of alcohol costs around INR 165 [I am referring to Indian whisky, foreign brands are certainly higher]. Halving the consumption here too will translate into savings. A movie ticket at a multiplex costs INR 300 per person [the same would cost INR 100 for a Sunday morning or the 11:30 am show].

Through the Nair family’s example, what I am getting at is when you are left wondering where all the money went at the end of the month, the first thing you need is an exhaustive [and honest] list of all your expenses. Then identify expenses, which you can easily cut down. If you get defensive about cutting down on the expenses, just think of how much you would make if you invest the money rather than spend it on something you don’t really need. Going back to the Nairs’ example, if Arjun invested the INR 7,000 he spends per month [after halving his consumption] on alcohol for 10 years, he would get INR 16,10,271 and after 20 years it will become INR 69,24,787. The table accompanying this article will help illustrate my point better.

Although I agree that Arjun’s scenario doesn’t apply to all, the point is that each one of us has some quirks or habits that slowly drain our corpus.

Spending vs Investing

Take a look at typical sources of financial leaks that most people are exposed to:

• Addiction to cigarettes, alcohol, expensive foods and drinks
• Not switching off heaters, air conditioners and electronic equipment after use
• Buying on credit and making only minimum payments on credit card outstanding balances
• Keeping money in low interest savings accounts and fixed deposits, and at the same time, keeping high interest loans.

It is perfectly fine to have occasional indulgences, but if you are addicted to certain items that do not seem to cost a lot of money now, some financial plumbing might help. The whole idea is to either seal the leaks completely, or run a tight ship, so that these leaks don’t sink your financial ship.

Savings are the building blocks of wealth creation and you must keep aside a portion of what you earn today, no matter how poor or how wealthy you are. Your lifestyle should match your current income, savings and financial situation. Else, some day these financial leakages will take you down. Spend but commit to ‘spending’ a certain amount of your income on investments.

By ‘spending on investments’ I mean that you must set aside a savings budget every month and consider that you have spent the money just like you spend on things; you need to forget about it. ‘Spending on investments’ should be your mantra before you spend on anything else. Even celebrities such as the late Michael Jackson, Mike Tyson and Bollywood stars of yesteryears went down financially as they forgot the cardinal rule of managing money: spend wisely or any income, no matter how high, can be spent completely.

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“Teaching kids to count is fine but teaching them what counts is best.” —Bob Talbert, American columnist

This quote lies at the core of the philosophy behind teaching fiscal responsibility to children. Parents and teachers focus on math and other artistic skills, with kids as young as four years old being enrolled in esoteric classes to get a head start in life. But amid all these classes, we forget to impart an important life skill—financial literacy. How many of us realise that when our kids enter the real world, the first thing they confront is money? As a wealth adviser, I have seen that when it comes to money, smart people commit blunders, whether it is in dealing with banks, taking loans or making investments.

The Art and Science of Teaching Children about Money

This is the reason one should begin teaching money management to kids at a very young age. The best time to do this is between 5 and 12 years, which is not to say that those above 12 years do not appreciate this concept. They do when the content is interesting, but it takes a little more time for them to understand the importance because they have developed deep-rooted habits and have turned into consumers. As they enter the teenage or beyond the sixth grade, they become hardwired because of peer pressure and external environment. So it becomes difficult to get them to adhere to a financial literacy programme. At this stage in their lives, they are keen to buy mobile phones, gadgets, branded clothes and do things that their friends are doing. Telling them to act sensibly and responsibly might be a tall order if you have not inculcated good habits from an early age. In fact, it is a good idea to introduce financial literacy as a subject in school from Class I itself.

Many of you probably give your children pocket money, but what you don’t realise is that this does not teach them the value of money or how to manage it. Most parents do not take the initiative to teach their children about money. They may touch on the concept of piggy banks and savings early on, but are usually reluctant to discuss money and family finances with their children. In the Indian context, money is a touchy issue, and in terms of discussing sensitive topics, ranks as high as sex education. The best way to teach kids about money is to let them deal with money early on for they need to understand its power and the consequences of their decisions.

It’s far better that they commit mistakes at a young age with smaller amounts of money than financial blunders when they grow up. By starting early, you can give your children a strong competitive edge for their future financial success. The key learning points for kids should include having healthy values about money, setting goals and priorities, making prudent choices, delaying instant gratification and understanding the virtues of hard work. Also, don’t forget that even though you might not teach your kids directly, they are learning by observing you.

AMAR PANDIT Financial planner and author of The Art and Science of Teaching Children about Money.

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