BoP cheer: Current account deficit may dip to 2%

The country may end 2013-14 with a current account deficit as low as 2 per cent of GDP thanks mainly to the significant drop in gold imports.

One of the two primary components of the balance of payments, CAD is the sum of the balance of trade (that is, net revenue on exports minus payments for imports), factor income (earnings on foreign investments minus payments made to foreign investors) and cash transfers.

According to a senior government official, encouraging signs on various fronts suggest a significantly reduced CAD — at around $40 billion. This assessment is much lower than the initial estimate of $70 billion or 3.7 per cent of GDP. Last month, Finance Minster P. Chidambaram had placed the CAD at $60 billion and later said he would try and bring it down to $56 billion, a figure at which the RBI had earlier pegged this deficit.

One of the “encouraging signs” is the slump in gold and silver imports, especially post the August clampdown by the Government. Commerce Ministry data show that import of these two precious metals fell to $1.05 billion in November, almost 80 per cent lower than in the same month last year. This has played a key role in bringing the trade deficit down by over 16 per cent to $33.8 billion.

D. K. Joshi, Chief Economist with research agency Crisil, is not surprised at the latest assessment on CAD but feels “it’s been down artificially”. Apart from restrictions on gold imports, the poor economic situation that has affected merchandise imports is also helping lower the deficit.

Joshi feels the key issue now will be the sustainability of the lower deficit especially after the gold import restrictions are eased. His own estimate of CAD is around 3 per cent of GDP.

Aditi Nayar, Senior Economist with ICRA, is equally cautious. She expects the CAD to widen in the third quarter (October-December) and the fourth (January-March) compared to the quarter ended September 2013. Not only was the supply of gold restricted, investment demand was curbed by hiking the Customs duty, she says.

“Moreover, a portion of demand had already been met through higher imports in April-May 2013. However, a favourable kharif harvest is likely to boost rural demand for the precious metals and the import bill may rise in the event of any easing of restrictions on gold import,” she adds.

Nayar also sees the possibility of a rise in non-gold and non-oil imports. “Additionally, merchandise export growth is likely to be muted in the fourth quarter given the base effect.” Overall, she expects a CAD of $50-55 billion in 2013-14. Although experts are sceptical of the Government’s latest expectation on CAD, they believe that if this does happen, the Government may ease up on the restrictions on gold imports. Indeed, the Commerce Department has already begun relaxing some of the curbs on the import of gold dore.

You can Cash in on Falling Rates with Tax-free Bonds

Long-term income funds & gilts can also give your debt portfolio a boost,says Prashant Mahesh 

Financial advisors are asking their clients to invest in a combination of tax-free bonds and long-term income funds to maximise returns from their debt portfolio in the coming year.The advice is based on the premise that interest rates are likely to start their downward journey sometime in the second half of 2014.Investors in high tax brackets could take advantage of the high interest rate and lock in their money in tax-free bonds.Investors with an 18 to 24-month horizon could stagger their investment in gilt funds over the next three months, says Vishal Dhawan,chief financial planner,Plan Ahead Wealth Advisors.Many investors fell in love with taxfree bonds in 2013.

It would be wise to continue the love story in the coming year as well,say investment experts.This is because apart from the taxfree interest,investors can also look forward to pocket capital gains on these bonds as the prices of these bonds are likely to go up when interest rates start falling sometime next year.The interest rates on tax-free bonds are linked to yields of government securities (G-Secs ). With a sharp spike in the 10-year benchmark to 8.8%%,these bonds are able to offer attractive returns.This financial year,we have had tax-free bond issuances from REC,HUDCO,PFC,NHPC,NTPC and IIFCL.IIFCL is currently open and offers retail investors 8.66% for 10 years,8.73% for 15 years and 8.91% for 20 years.In addition to the higher tax-free interest rates,these bonds give you the chance to earn capital appreciation as and when interest rates fall in the future, says Deepak Punjwani,head-debt markets,GEPL Capital.If rates fall by half a percent in the next year,you could earn as much as 3-4 % as capital appreciation on a 20-year bond.Add the coupon of 8.91% your return could be as high as 12.5-13 %.

However,experts ask investors to buy these bonds only if they can hold them till maturity,as some of these bonds may not be traded regularly and you may be forced to sell them at a loss if you want to exit early.If you have a high risk appetite and keen to ride the interest rate cycle,you could start investing in gilt funds in the next three to six months,say experts.But you should have the patience to wait for 12-18 months,they add.With vegetable prices showing some signs of cooling off,food inflation will see some moderation.This may make the RBI pause for some time.When focus shifts from inflation to growth the RBI could cut repo rates by 25-50 basis points later in 2014, says Ashish Shankar,head-investment advisory,Motilal Oswal Wealth Managers.

Growth has slowed down to 4.8% and IIP contracted by 1.8% in October, he adds.Bond prices go up when interest rates fall.Longer the tenure of the bond,the more sensitive it would be to interest rate movements.One basis point change in yield on a 20-year bond can change the price of the bond by 9-10 paisa,where as one basis point change in yield on a 10-year bond can change the price by 5-6 paisa, says Deepak Punjwani. He expects interest rates to fall by 50 basis points in 2014.If that happens,long-term bonds could be the best bet to benefit from falling interest rates as compared to short-term bonds.For the convenience of investing,experts advise routing investments in government securities through gilt funds.This is because government bonds (gilts) are available across maturities and carry little default risk,unlike corporate bonds which suffer from limited availability.A word of caution: dont take a plunge if you dont have time in hand as speculating on interest rate movement can result in loss of money.This is because even though the RBI kept policy rates on hold in the last policy review,there is no guarantee that it would maintain the policy stance.

If high inflation persists,then RBI could even hike repo rates by 25 basis points before pausing, says Alok Sahoo,head (fixed income),Baroda Pioneer Mutual Fund.Given this risk of a possible rate hike,shortterm investors with a six month to a year outlook should invest only in short term funds.

Hitting the Debt Road 

Invest in a combination of tax-free bonds and long-term income funds to maximise returns from your debt portfolio You can pocket capital gains on tax-free bonds as the prices of these bonds are likely to go up when interest rates start falling sometime next year If you have a higher risk appetite and are keen to ride the interest rate cycle,start investing in gilt funds in the next three to six months

Bharatiya Janata Party favours abolition of income, sales, excise tax

Bharatiya Janata Party today favoured abolition of income, sales and excise tax and the party may include it in its vision document to be unveiled ahead of General elections next year.

Former Bharatiya Janata Party president Nitin Gadkari, who is in-charge of preparing the party's vision document 'India Vision 2025', said that the party was presently deliberating the matter.

"We were talking about tax and although we have not decided as yet but a good presentation came before us. There is a suggestion of complete abolition of Income, Sales and Excise tax," he said, addressing a function on political agenda of political parties.

He said that the total revenue of the country is Rs 14 lakh crore and 1.5 lakh bank branches are operating in the country presently.

"If we abolish these taxes and if we apply around 1 or 1.5 per cent of expenditure or transaction tax, then we will get revenue to the tune of around Rs 40,000 lakh crore. So those 3.5 lakh people who are using beacons of various colours now, they will not be required anymore as no tribunals or commissioners will be required," he said.

"So I think along with transparency, there should be time bound result oriented administration coupled with right way of economic reforms and if it so happens, then the 1.5 lakh banks operating now will become 10 lakhs. There is another suggestion of doing away with Rs 500 and Rs 1000 notes..we are deliberating on these proposals as we want transperancy..." Gadkari said.

He said that he has interacted with 400-450 people already and the document is expected to come out in a month's time.

Echoing Gadkari's thoughts, senior Bharatiya Janata Party leader Subramanian Swamy said that there was no shortage of resources in the country and "if one had auctioned the natural recources properly, one did not have to have income tax at all."

Giving details, Swamy said if the government had auctioned 2G spectrum, one would have got at least 1.76 lakh crore as extra which went to private hands.

He maintained if the government had auctioned the coal blocks, it would have got Rs 11 lakh crore and by auctioning the oil sites, Rs 24 lakh crore could have been realised.

"Illegal money lying in foreign banks mostly stashed by politicians is Rs 120 lakh crore. And what is the total income tax bill...just Rs 2.5 lakh crore. Why should we pay income tax? I urge Nitin Gadkari that we should abolish income tax," he questioned.

"Do you think if you abolish income tax, the middle class will squander their money? No they will put it in banks and will be available for investment. It is the same with corporate income tax...You can abolish it.," Swamy added.