How will the Budget impact your personal financial plan?
How does a Union Budget impact or give signals about your personal finance plan. There are a variety of ways. The budget can give signals on interest rates. It can also give signals on inflation and price levels. There are measures in the budget which can make some of the personal finance instruments relatively more attractive. Here are 6 major changes to your personal finance plan that we foresee post the Union Budget 2018..
The government may reduce GST on financial services
This has been a consistent demand from the markets for quite some time now. An 18% GST makes a lot of products that attract GST quite expensive. For example, term plans of insurance, brokerage costs, fund management costs, portfolio management charges, DP charges; they all attract 18% GST. In the case of traders the higher GST combined with STT changes the entire economics of trading. Most individuals look at term plans for their low cost and insurance focus. By making them pay 18% GST on term plans, it is actually reducing the advantage that these term policies enjoy. It is expected that the government may reduce the GST on all financial services to the 12% bracket so that higher costs do not get passed on to the end client. This could either happen in the budget or even before that, but the government has reiterated its commitment to help investors create wealth over the long term through investing.
A shift to fiscal policy will mean no more rate cuts
The government is likely to use this budget to signal a shift in its policy focus from monetary policy to fiscal policy. That is an indirect indication that it may be the end of the road for further rate cuts at least in the immediate future. With the US likely to hike rates by 100 bps in 2018 and the RBI having already cut bank rates by 275 basis points in the last 3 years, the room for manoeuvre is very limited for the RBI. The government may give an indication of the shift to fiscal policy in this budget and that will mean lower returns on debt instruments. Investors in debt instruments may have to factor this in, especially if your exposure is largely to long-dated government bonds.
The budget may build in higher inflation due to higher fiscal deficit
Source: Trading Economics
If one looks at the CPI inflation rate over the last 1 year, the inflation rate has gone up consistently from 1.54% in June 2017 to 5.21% in December 2017. With the government likely to increase the available liquidity with the people, the pressure of demand pull inflation is going to be high. Additionally, oil prices are not showing any signs of retreating and that is evident in the oil prices in India. All this is likely to keep inflation levels elevated through the year. So if you have just made your plan and projected future outlays, it is time to revisit and perhaps increase the inflation assumption. This will give you a clearer picture of higher allocations you need to make or higher risk you need to take.
Brace yourself for higher returns on hard currency assets
Many of us do hold some foreign currency assets in our portfolio. Year 2018 could be a year when the rupee could remain under a bit of pressure. We have seen the trade deficit for the month of December shooting up sharply to $15 billion. With Indian crude imports at all time highs to cater to higher refining demand, the Indian rupee may remain under pressure. This may be the time to shift a part of your portfolio that is either denominated in foreign currency assets or those assets that benefit from a stronger dollar versus the INR. At least allocate 10% to such dollar defensives.
Some of the tax benefits may be skewed towards equities and risk assets
The government has been consistently trying to get more investors into wealth creating equities. With the sharp cut in interest rates in the last 3 years there has already been a big shift of retail money into equities as is evident from flows into equity funds. This budget may either expand the limit for ELSS funds or may also include select equity shares under the ELSS classification. Of course, this will come with the 3 year lock-in period. Alternatively, we also foresee a possibility where the Section 54EC benefits for reinvestment of capital gains may also be extended to equities and equity mutual funds.
Be prepared for less returns and more taxes on your small savings
This is a reality that most investors will have to contend with and adjust your personal finance plans accordingly. For example, we have already seen rate cuts in PPF and RBI bonds. Many more instruments could follow suit. Also the Direct Tax Code (DTC) is being finalized and one of the key provisions will be shifting most of the small savings from EEE to EET. That means while the investment and the returns will still be tax free, the redemption will be taxable. That will also change the economics of most small savings instruments. You need to factor it into your financial plan.
Interestingly, this budget 2018 will be critical to your financial plan in a variety of ways. One will have to really reassess their financial plan in the light of the trends post the budget!