As the dust settles on the Union Budget for 2013-14, the moral of the story is quite clear: if you don't want to be disappointed, then don't get your hopes too high. For a whole set of reasons, all of us--as savers, investors, businessmen and analysts--had psyched ourselves into expecting something special. As budget day came nearer, we heard the phrase 'dream budget' more and more. There was supposed to be some magic wand that Mr Chidambaram would wave and all would be well again.
It was always wishful thinking and has proven to be. However, from the perspective of personal finance, saving and investments, the budget has turned out to be a deep disappointment. There were a large number of quite reasonable expectations of simple measures that could have been taken but none of them have been. Somehow, the powers that be seem quite unaware of the fact that the ordinary individual saver is in a deep crisis and we need a structural overhaul in savings to rescue the situation.
We are saving less, we are saving in the wrong things and we are getting less from our savings. The propensity to invest in equity and equity-backed mutual funds is decreasing, while at the same time, deposits, bonds and other fixed-income investments are earning less and less compared to the consumer inflation rate. The budget does nothing for any of this.
In the weeks leading up to the budget, there were definite indications from the finance ministry that either an enhancement to the Rs 1 lakh limit for section 80C tax exemptions or some kind of a new pension-targeted saving scheme was in the works. None of that has materialised.
Instead, all we have is the extension of the Rajiv Gandhi Equity Savings Scheme (RGESS) from one to three years. Since it was first announced in the last budget, it has been clear that while the RGESS has the germ of a good idea, it was needlessly complicated. And learning to deal with all the complexity was not much use because the scheme could be used only once in a lifetime and that too by those who had never invested in stocks before. Now, that single-use limit has been extended to three but all the other complexity remains. A lot of people in the finance ministry will admit that the scheme was announced in haste with the wrong targets in mind but somehow the government seems anchored to those faults instead of thinking afresh.
The other changes too haven't materialised. The section 80C limit Rs 1 lakh is now unchanged for more than a decade and its real value has declined sharply. Channeling long-term, retirement-oriented savings remains a pipe dream.
Instead of improvements, the budget creates a couple of new problems. One is the massive hike in dividend distribution tax. If you are an investor who gets dividends from your stock investments or your fixed-income mutual funds, the deduction at source will be 25 per cent, rather than the current 12.5 per cent. Those who depend on these sources for income will be hit hard. From being barely more than the base income tax rate, the dividend distribution rate has gone up close to the highest tax bracket.
One more potential issue is that the KYC norms for insurance have been made easier, but not for mutual funds. This is an odd move, given that most of what is sold as insurance is actually investment products. Hopefully, by the time the budget is passed, this will be fixed.
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