In continuation of my 1st article on Budget analysis ‘Fiscal Deficit Financial Year-2020-21 depends on Stake Sale‘ of key areas I find that the new tax regime which is optional till now creates a significant problem for Indian savings. I also find that the day the New Tax Regime becomes permanent in the coming year’s many Insurance agents will be out of job and savings habit created through the taxation process will be at risk. The removal of provision means the removal of tax-saving compulsion under the various section like 80C,80D & 80DD all are related to employment –created as Agent.
Before that, I would draw the attention towards the Indian insurance stocks corrected massively yesterday and it was the 1st time such a broader correction. The correction has come up due to tow reason 1) LIC Disinvestment and 2) The new tax law. Every Insurance stock went down by 6% to 12% range post-budget session.
In an interview session, the Finance Minister told very clearly that the Direct Tax Reform is going to be one of the future road maps for the Indian economy. It means that section like 80C which is linked with a capital market players like Insurance and Mutual Fund are at risk in the near future. I am confident that the new tax law will get tweaks so that it gets adopted to Indian economy but the risk to the Insurance companies remains elevated.
Let me explain the 1st reason which is related to LIC disinvestment. The size of LIC is very huge and the valuation will also be huge but at the same time, it carries significant risk of being large. Now if LIC get listed and it valuation seems to be beyond attractive then there will be a reshuffle of weightage on individual counters of the listed insurance space. Mutual Fund and other institutional will shift the weightage towards LIC.
But relax it will take significant time to get into this mode but yes all depends on valuation. LIC is no doubt is the King of PSU in India. Every citizen has its name engraved on policy issues by LIC. But it carries the tag line of “Too Big to Fail”. I am not discouraging but the fact remains unchanged. The risk of LIC is that it holds too much corpus and too many investments and too many papers which hardly the public domain knows. In India, we have witnessed that historically whenever they used to be any financial crisis- LIC used to be asked by the government to buy them and save the crisis. So the portfolio risk and hits taken by LIC and the deep extensive diversification of its investments is the risk which is my concern.
The 2nd reason being the new tax law where till now all calculation shows little benefits if someone opts the new Direct tax Slabs. But yes as per the interview of the FM it is well clear that if today they have brought this they will get it implemented by adding tweak so it becomes lucrative. But the biggest question which comes in mind is that how this will this benefit the end-user even by tweaking and abolishing the provisions. In India, it has been found that India Investment % of GDP has been declining. In India, we don’t have social benefits hence the risk of living a poor life post-retirement is a risk.
India’s Investment accounted for 29.7 % of its Nominal GDP in Sep 2019, and it has fallen from an all-time high of 41.2 % in Sep 2011. Hence the current savings comes from parking funds in Tax saving instruments which forces an individual to invest and hence keeps him savings focused. India is currently focusing on consumption but consumption based on declining savings is not an ideal strategy.
Now removal of provisions means that Insurance business is at risk which major tax is saving instrument linked with the Individual tax saving instrument. This is the prime reason why Insurance companies reacted after the budget was announced. At the same time, the risk for Indian savings and investments for the long term comes under risk if the rules are not tweaked. We don’t have any social benefits as well as India is highly underinsured hence the risk of removing the provisions at any point of time is a big threat.