Leverage positives, rein in negatives in the interim budget 2014

Adhil Shetty Posted online: Tuesday, Feb 18, 2014 at 0000 hrs
The budget affects how you organise your finances, how you structure your loan portfolio and how you spend and consume. While income tax impacts us directly, changes to customs and excise, budgetary deficit and government debt affect us indirectly.

An interim budget is similar to a full-fledged budget, except the government cannot tinker with taxes and offer major schemes. It is valid till the new government takes over, which presents a full year budget.

While the interim budget wonít have a significant impact on your finances, itís worthwhile to look at the annual budgetís recurring theme.

Income tax: This affects you directly as tax is deducted from your salary at source. The good news is that governments have been raising exemption limits year after year.

Government debt and borrowings: A debt-laden government uses the major part of its borrowings to service debt. In fact, the government pegged its net borrowing for 2014-15 at R4.57 lakh crore, R11,580 crore less than the revised estimates for FY14. Bonds are mostly lapped up by institutional investors.

For individuals, the interest rate on personal loans goes up, directly affecting their savings and upsetting their financial plans. Also, since borrowing rates directly depend on government bondsí rates, the mortgage loan rate also goes up as it is linked to the base rate of banks. So, a government that issues bonds at high interest rates will have to increase the lending rate for home buyers and real estate investors.

Excise duty impact: Excise duty means inland tax on the sale and production of goods within a country. It is different from customs duty, which is tax imposed on imported goods. Excise duty changes prices of domestic goods, impacting your finances.

In the interim budget 2014-15, the finance minister has reduced the excise duty on small cars, scooters, motorcycles and commercial vehicles to 8% from 12%. SUVs will attract an excise duty of 24% against 30% earlier, and duty on large cars will now be 24% compared with 27% earlier. The duty on mid-size cars will go down to 20% from 24% earlier. This will reduce the price of automobiles.

Customs duty: historically, customs duty has been raised on luxury goods. However, thanks to rising purchasing power, people are increasingly able to afford imported goods.

Government spending: The governmentís expenditure has the power to fuel growth, create jobs and build an enabling environment for businesses. The reverse is also true when government spending is reckless, or in unviable schemes. In general, judicious spending creates employment, improves infrastructure and raises peoplesí living standard and incomes. That impacts your finances as better

employment prospects mean higher incomes.

Last but not least, a lot also depends on how an individual responds to budget announcements. Just as the budget is supposed to allocate limited resources for optimal use, individuals, too, must tweak their financial plans to allocate resources for maximum benefit. This will ensure that the negative impact of the budget is constrained and the positives are enhanced.

The writer is CEO, BankBazaar.com