Budget impact on inflation
Why is inflation impact so important to your financial plan? That is because your future goals are normally indexed to inflation. For example, if your monthly expenses are Rs50,000 and if the inflation rate is 6%, then your monthly expenses will increase by Rs3,000 each year just to maintain your current living standard. Now replace this 1 year time frame with a 20 year time frame and the implications for your future goals become much clearer. Extending the above case, you need to provide for monthly expenses of Rs1,60,000 per month after 20 years assuming 6% inflation. Now if the inflation were to shift to 7% average then for the same living standard you will need Rs1,94,000 per month. So, inflation shifts can make a big difference.
What does Budget 2019 mean for inflation. The budget has promised a big boost to farm incomes and that includes higher MSP on crops. So food inflation could be a contributor. Fuel will get costlier due to the higher excise duty and the infrastructure cess totalling to Rs2/litre. That will trigger fuel inflation. Overall, your financial plan needs to prepare for higher levels of inflation.
Budget impact on asset class returns
When you build your financial plan, one of the major assumptions is the expected returns over a longer period of time. Obviously, equity with the highest risk has the highest expected returns and liquid funds with the lowest risk have the lowest returns. If you are thinking of rates falling sharply, then think again. Two things could work against that. Firstly, the budget 2019 has already hinted at a sharp rise in fiscal deficit with more than 70% of full year fiscal deficit breached in the first 3-months. Secondly, the government will be relying on FII debt flows to bridge the resource gap and that implies an attractive yield spread over the US. At the current yield levels, there may not be much room for further fall in yields. Cost of funds will come down so returns on debt will also come down. So be prepared for lower returns on debt. However, flat interest rates, push towards a $5 trillion economy is likely to boost equity returns. That could be the asset class to surprise you on the positive side. In the midst of all this, the yellow metal could sustain its lure. Depsite higher excise duty, it could be a good asset class in your financial plan.
Budget impact on liquidity
Liquidity across asset classes could become tighter. Even when it comes to rescuing NBFCs, the budget is very clear about only helping NBFCs with liquidity problems and not solvency problems. Across equity and debt, there is likely to be a shift to quality and the premium that quality equity and debt will enjoy will be much higher in the coming quarters. As a financial planning strategy, you need to align your portfolio more towards large caps and lower risk stocks in the equity space. Even in the debt space, the focus should be more on premium rated bonds and government bonds. It is not worthwhile taking the additional risk implicit in low quality bonds. At least, not when it comes to your financial plan!
Budget impact on investment risk
How does the Union Budget 2019 impact the investment risk matrix? It has actually created a number of risks. For example, the proposal to increase public shareholding to 35% could create surplus liquidity in the system and take away the premium valuations enjoyed by some companies. Also, the aggressive divestment plan could mean that there could be a lot of equity supply floating in the market. From a financial planning perspective, you may have to be prepared for rationalization of valuations. Apart from the valuation risk, the budget may have also created cyclical risks in the market due to higher surcharge on super rich individuals and FPIs structured as trusts. The buyback tax is also likely to induce volatility in markets. As a strategy, your financial plan must be more attuned towards risk management products, diversification into other asset classes like gold and also adopting a more systematic and phased approach (SIP) to investing to overcome cyclical risks.
Budget impact on post tax returns
This has been a major change in the Union Budget. Post tax returns for a number of individuals are going to change drastically. Here are a few suggestive areas.
- If you are counting on buybacks for a tax free bonanza, think again. Buybacks are going to be steeply taxed at 20% of the price difference.
- If you are in the relatively higher income groups earning more than Rs2cr per annum, you need to pay surcharge at 25% and not at 15%. That goes up further to 37% if you earn more than Rs5cr per annum. That will majorly impact post tax returns.
- If you have been betting on concessions on LTCG tax on equities or on DDT or even on STT, perish that thought. Prepare your financial plan for these costs for a long time.