E-Paper
Home economics
The Budget has created a climate for better investment of household savings. The financial planning industry now needs an advisory model to turn savers into investors
Budget 2006 is marked by a stable approach towards dynamic change and a move towards a progressive attitude. There have been several positive indicators that will help augment the economy's growth and help in realising promises made — the processes of many of which is already 'in process'.
While the GDS/GDP ratio is increasing and has reached a remarkable 29.1 per cent in 2004-2005 from 28.9 per cent in 2003-2004 — the main contribution of the incremental savings rate came from the corporate and the public sector. The third component, household savings, grew at only 5.9 per cent — slower than the GDP growth rate — and thus made a negative contribution by moving down as a proportion of GDP.
There's a need to channelise a larger percentage of household income into long-term savings. This is one of the biggest challenges for the economy and can effectively be done through financial planning. The Budget is a vote for continuity and the FM has made a responsible statement that stability is the key to prosperity.
From the financial planning industry's standpoint, long-term planning and asset allocation are the key to prosperity. Here are discussed the most striking features of the Budget.
The GDP growth rate is 8.1 per cent, and the government is targeting a growth rate of 10 per cent. The reservoir of wealth that can be created during these 'good times' can become the building block for wealth creation for the masses. For this, resources should be mobilised from household savings.
The level of inflation at 4.1 per cent also seems to be under control. This, in spite of the across-the-board oil price hike. The control in inflation may have resulted from the healthy levels of revenue deficit (2.1 per cent of GDP) and fiscal deficit (3.8 per cent of GDP), which has actually outperformed the earlier estimations. At this juncture financial planning can help transform savers into investors.
The gross tax to GDP ratio has increased from 9.8 per cent in 2004-05 to 10.2 per cent in 2005-06. The reform measures and effective plugging of money-laundering activities has prompted the target of 11.2 per cent gross tax to GDP in the coming year, without making major tax changes.
Completion of the Golden Quadrilateral Project by 2008 will be an immense boon for the economy. Infrastructure created will increase labour mobility and help a larger spread of the population enjoy the benefits of economic reforms. Continued government support of FDI will finance growth in insurance and pensions, which in turn will spur growth in the financial planning industry.
Insurance reforms should ensure penetration in the market, as till date, a sizeable population is under-insured or not insured at all. This would fuel the need for a professional advisory model for financial products like insurance and mutual funds. The FM has also sent out strong signals to continue with the reforms on pension sector and implementing the PFRDA legislation.
The mutual fund industry will also benefit from further liberalisation. The measures proposed will effectively increase the asset diversification need of investors. The basic criterion that could augment growth is a distinction between an advisor and a seller of financial products. This would help inject a professional attitude in the industry. Only certified professional advisors are competent to assess the risk appetite and provide need-based solutions.
The overall capital market reforms are also good news. Allowing the insurance/ mutual fund/ provident fund/ pension players to share the RBI NDS platform will bring in much-needed liquidity in the debt market. This will effectively be a win-win proposition for the economy as well as the investors who will now get a window for investment in the debt markets, which will effectively form a large chunk of their total investment.
The need for investor protection has also been taken care of by introducing reforms in e-governance. The initiative to create an Investor Protection Fund under the SEBI, will help strike a balance and inject greater transparency in the market.
That investment in bank deposits for more than five years will now qualify for 80C exemption is another option of risk-free savings. Another important decision which will boost long-term savings is the increase of the Pension Fund Investment limit u/s 80CCC from Rs 10,000 to Rs 1 lakh. The waiver of FBT on superannuation contribution by the employer for up to Rs.1 lakh is again a proactive measure for long-term savings. Budget 2006 has been built on a mechanism that will help establish an organic growth process for all sectors.
The writer is CEO, Financial Planning Standards Boards India
