BackModi’s first year in office: Putting all the pieces together
In the past year, the macroeconomic environment has improved and business confidence has revived
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While changes in tax rules and more choice for retirement investments affect our wallets directly, those that are made at the policy level are required for the long-term benefit of individuals. Much has happened in this direction during the Narendra Modi government’s one year in office.
Insurance bill passed
After much delay, the government finally managed to get changes to the insurance law passed. The Insurance Laws Amendment Act, 2015, allows for higher foreign direct investment (FDI) in insurance companies—from 26% to 49%.
According to estimates, this is likely to bring more than 20,000 crore of foreign capital into the insurance industry and help insurers not only with capital but also technical expertise. In fact, things have already started moving on this front. The Foreign Investment Promotion Board (FIPB) has cleared a proposal by Paris headquartered, AXA Group, to increase its stake in its insurance joint ventures with Bharti Enterprises Pvt. Ltd to 49% from 26%.
“The fact that the government managed to pass the insurance bill resonates well with the general demand of quick decision-making and speedy reforms," said Piyush N. Singh, managing director, financial services, Accenture India. “However, with regard to hike in investments in joint ventures, things may not move as quickly as people may expect. This is simply because the key is to sort out valuation, and so both the Indian and foreign partners will take time. But the industry is going to see consolidation aided by the insurance bill," added Singh.
The amended Act also brings some important customer-friendly changes to insurance rules. For instance, it allows the Insurance Regulatory and Development Authority of India (Irdai) to decide distributor incentives—important given that many abuses in the industry are due to poor sales practices.
The Act also increased the overall quantum of penalty from 5 lakh per incident of violation to 1 lakh per day per incident, going up to a maximum of 1 crore per incident. The new rules also make it mandatory for a life insurer to settle any claim that comes in after three years of buying a policy. These amendments are likely to make the insurance business more vibrant and customer-friendly.
Aiming at financial assets
India imports large amounts of gold, which was one of the reasons behind the high current account deficit that led to a sharp fall in the rupee in 2013. The government wants to attract savings from physical assets such as gold towards financial assets. This will not only help maintain a desirable external balance, but also boost financial savings, which can then be used for investments. In budget 2015, apart from the gold monetization scheme (GMS), finance minister Arun Jaitley also announced a sovereign gold bond. Under the GMS, depositors of gold will earn interest. The gold bonds will carry a fixed rate of interest, and can be redeemed for cash at the price of gold that day. The government, on 19 May, issued draft guidelines for the GMS, but details for the bonds are still awaited.
Real estate, too, saw some changes. The government brought some clarity to the ambiguous taxation of real estate investment trusts (REITs). In its first budget in 2014, the government provided partial pass-through status to it. In 2015, it rationalized the capital gains for sponsors exiting at the time of listing of the REITs’ units, subject to payment of securities transaction tax (STT). Besides, rental income from the assets that the fund holds was made taxable in the hands of the unit holders. These changes are likely to make REITs a viable option for investors and also channelize financial savings into the sector.
Stock signs
At any point of time, many factors play a role in the stock market. But in the past year, the dominant theme was the general election, government formation and, later, steps taken by it. The financial market euphoria that greeted the government in May 2014 has subsided to some extent, though the general sense in the market is that the government is moving in the correct direction. The S&P BSE Sensex, which gained about 30% in 2014, is up by just 1.67% in 2015. “The government has done the right things. The intentions are good and the execution has also been done reasonably well. But one thing that could have been done is that it could have managed the political aspects of legislations better," said U.R. Bhat, managing director, Dalton Capital Advisors (India) Pvt. Ltd.
Of course, there are other factors influencing the stock market. For example, the much awaited revival of company earnings has not happened yet and results for the March quarter have once again disappointed investors. Also, after the unseasonal rains in recent months, which affected the winter crop in large parts of the country, the monsoon is expected to be below par, though a clearer picture will emerge only later. If the monsoon is deficient, as it was last year, it can affect incomes in rural areas, which, apart from hurting demand in the countryside, can further delay the revival of company earnings. Sentiment on the street is also being affected by issues related to taxation of foreign portfolio investors.
While the markets are jittery because of subdued prospects in the short run, a lot has happened in the past year. The macroeconomic environment has improved and business confidence has revived. Efforts have been made for speedy project clearance, and foreign direct investment rules have been liberalized in areas such as insurance, pension, railways and defence. To revive investment and growth, capital outlay has been increased with a focus on infrastructure. The fall in oil prices helped contain subsidy outflow and deregulate diesel prices. It also helped reduce inflation, which prompted the Reserve Bank of India to cut interest rates by half a percentage point. The market is now hoping that the central bank will again cut rates when it reviews the monetary policy on 2 June.
Mint Money take
The steps taken are in the right direction and will improve financial lives of households. The only big disappointment is that investment activity at the aggregate level has not picked up to the desired extent. A revival of investment would have perhaps resulted in better equity returns.
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