Freedom to invest

Given the sharp decline in Indian financial savings from 10 per cent of GDP to 7.2 per cent over the last five years, investors as well as policymakers were looking to this Budget to provide tax incentives for financial investments. The simplest way for the finance minister to have achieved this would have been to increase the omnibus limit for tax-saving investments under section 80C, which stood at ₹1.5 lakh, to, say, ₹2 lakh or ₹2.5 lakh. But the finance minister eschewed this simple solution and instead chose to announce a number of product-specific tax breaks under existing 80C limits. These add up to a fair sum, but needlessly complicate investment decisions for savers and take away their fundamental freedom of choice.

There is no doubt that the Indian households’ declining affinity for financial savings was cause for concern. With savings in recent years flowing mainly into illiquid physical assets such as real estate and gold, the corporate sector has been deprived of capital. This problem needed to be tackled without micro-managing the portfolio choices and risk preferences of individual savers. Yet this is exactly what the Budget has done. Tax deductions for health insurance premiums have been sharply hiked, but these are in reality not investments at all, as savers earn no returns from them. The Sukanya Samriddhi scheme has been added to the menu under the already crowded section 80C. But it obviously cannot be used at all by savers without a girl child. Tax deductions for contributions to the NPS have been sharply hiked. As retirement options go, the NPS is better than most other avenues, as it is low-cost and flexible. But it is by no means perfect, with withdrawals attracting income tax and investors forced to use 40 per cent of the NPS proceeds to buy an annuity plan. Therefore, why should the Centre disincentivise the PPF and promote the NPS?

Wooing retail investors into products through tax sops isn’t a great long-term solution to the problem of dwindling financial savings. Take equities, which the Centre has been trying to promote through this method for many years now. Equity mutual funds attracted hardly any inflows for six years when the markets were moribund, but have received record inflows in the last fiscal after posting high double-digit returns. This shows that retail investors make their asset allocation decisions based on their risk appetite and return experience from an asset class. Thus, allowing them a large menu of products with the freedom to switch between them appears to be the best way to promote financial instruments. This apart, the many ponzi schemes unearthed by regulators have shown that most Indian savers avoid regulated products due to their complexity and lack of accessibility. Fixing these problems and tightening the investor protection framework as recommended by the Indian Financial Code would have been a far better way to step up financial savings.

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