By Umang Papneja
Indian Union Budget 2021-22: When I began my wealth management profession at the turn of the century, RBI bonds have been the easiest investment alternative we as wealth managers would provide to HNIs. There have been two kinds – one was the 8% taxable bond and the other being the 6.5% tax-no cost bond. Clearly, the concurrent presence of tax-no cost and taxable bonds is not new. Back then, investors have been drawn to the tax-no cost alternative and could very easily distinguish among the two in terms of their respective worth proposition. Even today, the tax-no cost bonds issued by PSUs, at the begin of the final decade, trade at 4.5% even though taxable bonds of the exact same PSUs, and exact same residual tenor, trade at 6.5%. The tax-no cost bonds, more than the years, normally trade at one hundred-150 bps reduce than their taxable counterparts. Today, as we stand at the cusp of the next standard, and redesign methods and policies in the aftermath of the COVID-19 pandemic, we will have to envisage revolutionary and holistic options.
In the backdrop of such an atmosphere, a basic option to be viewed as in the upcoming Union Budget would be to situation a separate series of tax-no cost government securities (G-Secs). Let’s take an instance to see what occurs if the government borrows by means of tax no cost bonds from folks, in dematerialized kind and lists these securities on the stock exchanges:
- It substantially reduces the expense of borrowing: Going by existing marketplace yields on previously issued tax-no cost bonds, new tax-no cost issuances can aid the government minimize its interest expense by roughly 20-25% for the next 10-15 years. Interest expense as a percentage of GDP can stay steady as borrowings rise in the aftermath of the pandemic.
- No meaningful influence on the tax collections on coupons paid: G-Secs are largely bought by provident funds and insurance coverage firms, which basically do not spend tax on investment earnings. Mutual Funds also invest in G-Secs and the investor pays lowered tax as tax is computed on indexed gains. Retail participation is negligible. Consequently, the total tax earnings arising from the coupons paid by these bonds are somewhat minuscule for the exchequer.
- Enable retail participation: The government securities marketplace could tap into the pool of savings of an completely new segment of person investors. Moreover, this would provide retail investors with a secure and worth-accretive investment alternative. Previous tax-no cost bonds, issued by PSUs more than a decade ago, collected more than 1 lakh crores. Today, the quantity could be substantially larger.
Government Securities can be issued by the central government or by state governments. The state government issuances are named SDLs. Tax-no cost issuances can also aid state governments reduce their expense of borrowings. In the existing fiscal, states have borrowed 42% more than the borrowings in the corresponding period of 2019-20. The typical SDL borrowings so far in 2020-21 have been slightly more than Rs. 14,000 crores each and every week. Further, in a current release, the Reserve Bank of India, in consultation with the State Governments/UTs, announced that the quantum of total marketplace borrowings by the State Governments/UTs for the quarter January – March 2021, is anticipated to be Rs. 3.16 lakh crore. Clearly, the ask from the states’ viewpoint is but to be holistically met.
In an atmosphere, which is yield-starved, coupled with lack of fixed earnings deployment selections for investors, tax-no cost government securities will be a win-win for each the government (reduce expense of borrowing) and person investors (core allocation of tax no cost bonds as a portion of their fixed earnings portfolios).
(Umang Papneja is the CIO of IIFL Wealth Management. The views expressed are the author’s personal.)