The Hindu Business Line : Budget Wishlist

We are again at that point in a year when North Block (Delhi) gains more attention from the business community than Dalal Street (Mumbai). The importance attached to the Budget is testimony to the fact that more reforms need to be in place to free up the economy from government control. (Despite all the ‘Sarkari’ efforts to make Budget a non-event).

The mutual fund industry, as a key component of the larger banking and financial services sector, must obtain a major policy emphasis in the upcoming budget because the industry is uniquely placed to mobilize the nation’s financial resources and allocate it within the transparent contours of responsible investment mandate.

In India, the responsibility of individual social security largely rests on the individual and therefore a major part of resource mobilisation is beyond state’s control.

On the economy

The ‘8.5 per cent plus’ growth in the economy has had a salutatory effect on the income levels of the ordinary Indian. It is therefore no surprise that we witnessing an above 25 per cent growth in tax collections in the last three years. This tax-elasticity and sound adherence to FRBM norms provides the government with a major opportunity to widen its tax-payer base, while at the same time, rationalising it to accredit the real income distribution.

The Government can re-assess the minimum tax-ceiling rate after accounting for the rise in inflation levels to provide succor to the tax payers at the lower rung. Direct tax incidence on the individuals can also be rationalised by eliminating the ‘surcharge’ category and providing a minimum of 2-3 slabs with flat tax rates.

On mutual funds

The Government. had in August 07 allowed PSU Funds, New Pension Scheme and Postal life Insurance Funds to invest their surplus cash (around 3,00,000 crs) with PSU Mutual Funds- provided that pre-set conditions are met in this regard.

I believe that this measure remains half-hearted and will not prove completely effective unless PSU-money managers are given exhaustive choice of investment from the mutual funds industry. The instituted discrimination against other SEBI registered mutual funds disallows the ‘public money’ from finding the fullest possible allocation based on investment merit. I remain optimistic that this discrepancy shall be done away with and PSU cash managers may get the flexibility of investment decision irrespective of public/private status.

Additionally, I find it difficult to explain the fact that while pensioners from US and Europe are allowed to gain a stake in the fortunes of Indian stock market, Indian pension and provident funds remain restricted from the same. I believe that this anomaly should be addressed and the Employee Provident Fund should be allowed to obtain exposure in the Indian stock market.

Specific to MF products, returns on investment of Fund of Funds (FoFs) schemes currently attract a differential tax treatment (akin to Debt) while equity schemes of the mutual funds enjoy tax breaks. In this context, the taxman makes no differentiation between the diversity of FoFs offerings – ranging from Debt FoFs to Hybrid FoFs to Equity FoFs.

I think this divergence incorrectly penalises the investor of Equity FoFs, who is basically investing in equity but through multiple managers. I am, therefore, of the view that FoFs investing 65 per cent or more of its assets in equity-oriented mutual funds should also qualify for the same exemption as granted to equity-oriented MF schemes under section 115T of IT Act.

The minimum criterion for a fund to be defined as an equity-oriented mutual fund should be brought down from 65 per cent to 50 per cent. This not only fits into the logical definition, but would also help to place ‘balanced funds’ in the appropriate scheme category on a risk spectrum.

Finally, I understand that FY09 Budget is the last from the incumbent government’s stable before the general elections take place. There are the demands fiscal prudence — while walking a tight-rope of reforms. Stock market observers too remain keenly observant of the Budget to obtain cues for the future direction. With so many demands to fulfil, may most of the wishes be fulfilled!

Sandesh Kirkire

CEO, Kotak Mutual Fund

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