Decoding the Union Budget 2022-23 – Quantum Mutual Fund – Mutual Funds & ETFs – Trading Q&A by Zerodha

Increased capex spending to prioritize long term growth, tax on digital assets (read cryptocurrency, NFTs), timeline to launch a digital currency were some of the highlights of the Union Budget 2022-23. Get perspectives into the budget from Arvind Chari, CIO, Quantum Advisors and Quantum Mutual fund managers, who decode the budget for investors.

Equity View

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Sorbh Gupta – Fund Manager – Equity

“While the Government’s continued focus on Capex is good for long term growth, we believe tax cuts would have boosted consumption and helped the economy in the near term”

Fixed Income View

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Pankaj Pathak, Fund Manager – Fixed Income

“Higher than expected fiscal deficit and absence of any announcement on global bond index inclusion is a negative for the bond market.”

Gold View

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Chirag Mehta – Sr Fund Manager – Alternative Investments

“Union Budget of 2022-23 disappointed gold markets by skipping to reduce custom duty on gold.”

From the CIO

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Arvind Chari, CIO, Quantum Advisors

“Increase in Government CAPEX spending should be able to revive private CAPEX activity and bode well for Indian equities over the medium term. However, Government’s response in terms of some income support or a lower tax burden has been missing.”.

Positives:

The Government continues to focus on the supply side through high allocation to CAPEX.

Increase in Capital Expenditure spending from INR 5.5 trillion budgeted for FY 22 to INR 7.5 trillion for FY 23 (35.4% increase, ie, 2.9% of GDP)

The Government has resisted being populist despite big state elections & which is a big positive.

A timeline to launch a digital currency by the RBI – Introduction of central bank digital currency (CBDC) to done in FY23.

Negatives

Missing income support would hurt consumption.

No tax cuts which would have boosted consumption and helped the economy in the near term

No mention of rural employment. While higher growth will trickle down over time, however, there should have been some immediate relief to the economic segments which were impacted by the pandemic.

Increase in import duties to boost domestic manufacturing on the back of improving growth will lead to higher cost pressures in the economy

Government has chosen to tax digital assets (read cryptocurrency, NFTs). Income from transfer of digital assets to be taxed at 30% without any provision for deductions except for the cost of acquisition. While on the other hand, it means that they are not outright banned.

Custom duty on gold currently stands at 10.75% which is very high and contributes to price distortions, working against the various gold market initiatives undertaken by the government.

What investors should know

Equity

Increase in government CAPEX spending should be able to revive private CAPEX activity and bodes well for Indian equities over the medium term.

If Government Capex spending is implemented in a timely manner, it could lead to a multiplier effect in the economy. This should enable the continued economic recovery and extend the growth over the next 2-3 years.

Domestic focused cyclical sectors like banks, materials & capital goods are expected to do well.

Investors can still consider equity as it will remain an attractive asset class and is expected to do well over the long term. Investors are advised to remain invested and take the opportunity of the recent correction.

Investors can build a diversified equity portfolio with a long term horizon in the 70-15-15 ratio with an Equity Fund of Funds, Value Fund and ESG Fund Fixed Income

Fixed Income

Higher than expected budget deficit target of 6.4% for FY 23

Bond markets will have to face a very high level of borrowing both from the Center and states.

Higher borrowing requirements of the Center and State Governments will put pressure on the bond markets.

In the backdrop of higher oil prices, a hawkish US FED and the pressure on the RBI to tighten policy, the higher borrowing will see bond yields rising.

Across the yield curve, over the course of the year, we will expect bond yields to rise by 20-30 bps for now.

The RBI will also have to start hiking its policy rates and we would expect at least a 100 bps increase in rates in FY 23.

Fixed Income investors should stick to categories like liquid funds or other short-duration fund categories

Gold

Finance Minister Nirmala Sitharaman disappointed gold markets by skipping to reduce custom duty on gold in the Union Budget of 2022-23.

gold however, Continues as a risk-diversifying portfolio diversifier

Gold remains as an efficient portfolio diversifier. The current volatility in equity markets is a good opportunity to increase allocation to Gold so that it occupies 20% of your overall portfolio.

Moreover, some more highlights from the budget include:

For salaried employees:

Increased tax deduction from 10% to 14% on employer’s contribution in NPS for state government employees on par with Central Government employees

Individual taxpayers filing income tax returns will now have the opportunity to update their returns up to 2 years after the end of the relevant assessment year in case they missed out to include any income when the return was first filed. However, an additional tax of 25% to 50% will be payable on the tax and on filing of the updated return on the additional income.

Post offices coming under the core banking system will facilitate digital transactions, resulting in easy accessibility and convenience

Capping of surcharge on long term capital gains (LTCG) on sale of any type of asset (listed equities liable to maximum surcharge of 15% while other LTCG are subject to graded surcharge up to 37%), will reduce the effective long term capital gains tax rate in the hands of investors

For homemakers

Financial support for digital payments ecosystems to continue.

Tax deduction on annuity and lump sum sum from insurance schemes taken for differently abled dependents will be applicable during the lifetime of parents/guardians, ie, on parents/ guardians attaining the age of 60 years

Customs duty on cut and polished diamonds and gemstones, certain fruits, dry fruits, grains, seafood, etc, has been reduced

Digital Rubee by the RBI will lead to more efficient and cheaper currency management system

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