Harshendu Bindal, President – Franklin Templeton Investments (India), suggests that documentation for investing in mutual funds should be relaxed by enabling the use of UID cards so that people who don’t have PAN cards can invest in MFs.
What key priorities and concerns should the budget address? Given the current macro-economic scenario and recent poll election results, this year’s budget will be closely followed for an insight into the government’s stance on various pending reforms, steps towards fiscal consolidation and policy measures to facilitate a recovery in capex cycle. The roadmap on fiscal consolidation is crucial as it holds implications for monetary policy, as clearly indicated by RBI. It will need to be seen how the government strikes a balance between spending on inclusive growth initiatives and moving forward on fiscal agenda.
Other areas needing attention include tackling supply bottlenecks, pushing up inflation and infrastructure, along with reforms to attract FDI flows, bolstering talent pool and labour reforms. There is likely to be an increased investor focus on the fine print for clarity on implementation of various announcements and their underlying assumptions. The government is likely to augment revenues through expansion of tax net and increase in indirect taxes. Increase in tax exemption limits for individuals could be used as a tool to boost private consumption. Any tax breaks to encourage savings into basic needs such as retirement, children’s education and health will be a positive.
What measures do you think are needed to make our capital markets stronger?
While the household savings rate is high in India, most of these savings find their way into unproductive physical assets such as gold and real estate. And while there has been a gradual increase in the share of financial assets, this could be further encouraged by providing tax benefits to channel the high savings into capital markets and financial institutions such as bank, mutual funds and insurance, and also to fund infrastructure development. Such efforts can reduce India’s dependence on foreign capital flows and help expand the investor base.
Another aspect is enhancing the market regulatory and infrastructure framework for corporate bond markets in India. A liquid bond market can help companies reduce their financing costs and also help them raise long term funds. Higher participation and liquidity can be brought about by doing away with investment restrictions on pension funds and insurance companies – these entities play a key role in developed markets and are also critical for financing long-term infrastructure development programmes – as well as reduction/ rationalization of the stamp duty structure for bond issuances.
With mutual funds still accounting for a tiny fraction of household savings what needs to be done to make MFs, from a policy perspective, to widen their reach?
There are mainly three things that can help increase industry penetration:
Enhance financial awareness – there is clear need for increasing awareness for various financial products amongst masses and policy should adopt D. Swarup Panel recommendation to set up FINWEB (Financial Well-Being Board of India).
Relaxation of documentation norms – enabling usage of UID cards apart from PAN cards for the purpose of documentation will help, given that a large chunk of the population does not pay taxes and therefore does not have a PAN card.
As mentioned earlier, tax breaks for retirement, children’s savings and health care investing, as is the case in the West would be useful. This would encourage financial planning and savings for important life stage needs of all investors.
How is the proposed borrowing programme in budget likely to affect bond markets? What would be its impact on debt funds?
It is difficult to predict the exact quantum of government borrowings for FY13. In our view, the government is cognizant of the economic benefits that would trickle through from fiscal consolidation and would look to augment revenues as well as curb expenditure where possible. Revenues could get a boost from telecom auctions. On the flip side, the situation will be keenly tracked for impact from Food Security Bill and State Electricity Board losses. A credible fiscal consolidation plan will certainly help bond yields edge lower as well as strengthen the case for monetary policy easing.
In our view, given the current macro-economic situation, investors are better off investing in open-end fixed income funds. RBI is likely to wait for clarity on various factors before it cuts policy rates. Despite the weakening growth trends, RBI has been wary of reversing the rate hikes due to the high fiscal gap and structural supply-demand imbalances that are pushing up inflation. Policy statements indicate that the tightening cycle is behind us, though the timing of reversal rests on government efforts to control the fiscal deficit and sustainable moderation in inflation. The recent rise in international crude oil prices could push up inflation as also any efforts by the government to curb subsidy bill. Actively managed open-end funds would be better positioned than closed-end fixed maturity products in navigating the current uncertain environment and delivering superior, risk-adjusted returns.
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