India - Politics: DMK withdraws support; to add fuel to the fire... expect weaker market in short term

DMK withdraws support

to add fuel to the fire… expect weaker market in short term

UPA's problems seem to be getting more complicated. A series of scams led to a public outcry. The face saving exercise started but only after receiving pressure from opposition and even its own allies. Removal of A Raja and investigation action against him has finally led to DMK withdrawing support. Citing the seat sharing dispute in TN assembly election as the apparent reason, the DMK has surprised the UPA by taking this action. The major fallout will be in the number game of UPA. AIADMK can not compensate for the loss as it has only 9 seats in Loksabha against 18 of DMK. In this situation, the UPA has to depend more on SP or BSP which will ask for its share in power, if given a chance to work actively in the Govt. The situation is very liquid and we will be closely watching the same.    

The market has been a victim of a series of domestic governance issues along with international events. After reaching lifetime high in Nov 2010, the Jan-Mar 2011 period has been very tough. The market has corrected by more than 10 % during 2011. First, it was FII outflows to the tune of US$2bn (Jan'11 till date) as the money started moving out from emerging markets to the developed market on the back of an expected economic recovery. The domestic economic data was also not suggesting a favourable picture with falling IIPs, increasing inflation and interest rates, mounting current account deficit and quarterly results being lower than expected.

On the international front, the events in Egypt, Tunisia, Libya and other Middle East countries have increased the Indian crude oil basket again to a US$108 mark indicating a red flag on equity markets world over.

To add to this, the fallout of the DMK withdrawal would again keep pressure on the Indian markets. With the political risks rising we believe that the government machinery will be less inclined to take decision, the direct of impact of which will be on a lot of infrastructure projects that needs green signals. As far as the UPA is concerned, it will be very defensive for some time till the current issues get settled down. We do not expect any major move on issues like FDI, deregulation of diesel prices, any bold measures to cap the fertilizer and fuel subsidies in near future.      

In short term, the market is likely to show weakness. Even though valuations seem to be reasonable (14.4x FY12E Consensus EPS of Rs1,266), the investors will be cautious in investing as the domestic issues like governance; weak economic data will be now fuelled with the new political development. The international scene is also not optimistic with Indian crude oil basket rising above US$108 resulting in weaker equity markets world over.  

Budget Highlights Feb 2011

Budget Highlights Feb 2011

• Fiscal deficit pegged at 4.6% of GDP for 2011-12.
• Fiscal deficit projected at 4.1% and 3.5% for 2012-13 and 2013-14, respectively.
• Revenue deficit for 2011-12 pegged at 3.4%.
• Revenue deficit for 2010-11 revised downwards to 3.4% from the budgeted estimate of 4.0%.
• Net market borrowings for 2011-12 is budgeted at Rs. 3,430 billion, 2.3% over 2010-11.
• Total expenditure for 2011-12 to increase by 3.4% over 2010-11.
• 1.4% fall in capital expenditure, while 4.1% increase in revenue expenditure over 2010-11.
• Personal income tax slabs changed:
• Income upto Rs.1.8 lakhs – nil.
• Income between Rs. 1.8 lakhs and Rs. 5 lakhs – 10%.
• Income between Rs. 5 lakhs and Rs. 8 lakhs – 20%.
• Income above Rs. 8 lakhs – 30%.
• Incomes of senior citizens between 60 and 80 years of age, to be exempted upto Rs.2.5 lakhs and for those above 80 years, exemption applicable upto Rs. 5 lakhs.
• Standard rate of excise duty on all non-petroleum products to be maintained at 10%.
• Minimum Alternate Tax (MAT) rate to be increased from 18% to 18.5%
• Rate of service tax retained at 10%, but coverage extended
• Disinvestment receipts for 2011-12 estimated at Rs 40,000 cr.
• Government to move towards direct transfer of cash subsidy for kerosene and fertilizers.
• Foreign investors who meet Know Your Customers (KYC) norms to be allowed to invest in Indian equity mutual funds.
• FII limit for investment in corporate bond with residual maturity of over five years issued by companies in infrastructure sector, is raised by US$ 20 billion to US$ 25 billion
• Rs 6,000 cr allotted to public sector banks to maintain a Tier 1 CRAR of 8% during 2011-12
• Direct Tax Code to be implemented by April 1, 2012
• Allocation to infrastructure at Rs. 2,14,000 cr for 2011-12, 23.2% higher over previous year

LONG TERM INFRASTRUCTURE BONDS U/s 80CCF OF INCOME TAX ACT 1961

Finance Minister in Union Budget had introduced a new section 80CCF under the Income Tax Act, 1961 that provide income tax deduction of Rs. 20,000 in addition to Rs 1 Lakh available under other provisions for claiming tax deductions for investments made in the Long Term Infrastructure Bonds that are notified by the central government.

This announcement will boost the infrastructure projects in India. The deduction can be claimed by individuals or HUFs for the investments made in subscribing the long term infrastructure bonds during the FY 2010-11.


Which Long-term Infrastructure Bonds eligible for tax deduction?
As per the notification given by the central government, the bonds issued by following entities are eligible to subscribe as long term infrastructure bonds and eligible for a deduction under new section 80CCF

Industrial Finance Corporation of India (IFCI), Life Insurance Corporation of India (LIC), Infrastructure Development Finance Company (IDFC) and Non-Banking Finance Company (NBFCs) who are classified as an infrastructure finance company by the Reserve Bank of India (RBI).

Benefits of Tax savings for Long Term Infrastructure Bonds
Any investment in long term infrastructure bonds up to Rs. 20,000 is eligible for tax deduction from the taxable income. This means for an individual falling under 30% tax bracket will effectively save Rs 6,180 and a lower tax bracket individual of 10% will save tax up to Rs 2,060.

Lock-in period & Yield of the bond
These long term infrastructure bonds will be available for tenure of minimum 10 years and the lock-in period of 5 years. It means investors can not exit from the bonds before 5 years and after 5 years they have an option to exit in the secondary market or via buyback offer given by the issuer. Investors can also pledge the bonds in some specified banks to obtain the loan against the bonds only after completing the lock-in period.
Yields of the long term infrastructure bonds and other detailed terms and conditions are specified by the issuers at the time of launch on the respective bonds. However, the important thing to note is the yield will not be higher than the yield of government securities of corresponding residual maturity schemes.

Who are Eligible Investors?

Only Resident Individual (Major) and HUF can invest in these bonds.

To Conclude Any tax saving investment is always welcomed by tax payer however before investing such tools it is wise to check the returns from the investment over the long term period.

 To Apply in Delhi, Noida & Ghaziabad Region, Call: 0-9873016716, 0-9910009312| Email: info@safeinvestindia.com