If your total income is up to Rs5 lakh, don’t file returns

Total income should be from one employer and can include interest income from savings bank deposit

If you are a salaried individual with a total annual income up to Rs5 lakh, you can stop chasing the 31 July deadline to file your income-tax returns (ITR).

The Central Board of Direct Taxes (CBDT) has notified the scheme that exempts salaried individuals with a total income up to Rs5 lakh from filing returns for the assessment year 2011-2012.

Says Homi Mistry, partner, Deloitte Haskins and Sells, a tax consulting company: “The notification is perhaps useful for individuals who have very low salary. For example, individuals who have started afresh or those in the lower income group like office boys.”

What makes total income

The total income should be from your salary and from a single employer. Your total income can also include interest income from deposits in a savings bank account up to Rs10,000.


To calculate your total income, factor in all the deductions. A deduction is a straight subtraction from your income and the remainder is your taxable income. Some of the most popular deductions come under section 80C, including premiums of life insurance policies, principal repayment of home loans, savings in an equity-linked savings schemes and investments in Public Provident Fund. If you have a health insurance policy, the premiums will qualify for a deduction of up to Rs15,000 under section 80D.

What you need to do

Though you need not file your ITR, you will need to give your Permanent Account Number and details of the entire interest income from your bank to your employer. After factoring in all the deductions and exemptions, your employer will then deduct tax payable by you at source. The Form 16 that you get will reflect the tax deducted at source (TDS).

Who’s out of ambit

But if you are earning a salary from more than one employer, or have other income sources in addition to interest income from your savings bank account and salary, you will need to file your returns even if your salary is up to Rs5 lakh. Also, if you have refund claims, you will need to file tax returns.

The scheme shall also not be applicable in cases where notices have been issued for filing ITR under section 142(1) for late or non-submission of return; or section 148 for reassessment; or section 153A for search and requisition; or section 153C for any other person.

The limitation

The proposal was first made in Union Budget 2011-12, when the finance minister evinced interest in notifying a category of salaried taxpayers, whose tax liability is discharged by their employers through TDS.

However, what seems to be a convenient move may actually not turn out to be a practical one. Says Sudhir Kaushik, co-founder and chief financial officer, Taxspanner.com, a tax filing portal: “From a practical standpoint, an individual should anyway file his income-tax return. It not only helps an individual keep a record of his tax history, but is also required when one wants to submit an application for a visa, a bank loan, or any such application for which one needs to furnish an authentic proof of income.”

The income-tax return receipt is an important document and is used for authentication purposes in some cases, such as getting a visa when travelling abroad or applying for a bank loan. So it may actually make sense for you to file your returns even if your total income is up to Rs5 lakh.

Source:Live Mint

The $616 billion question: Does the euro crisis have a hidden AIG?

It's the $616 billion question: Does the euro crisis have a hidden AIG? No one seems to be sure, in large part because the world of derivatives is so murky, but the possibility that some company out there may have insured billions of dollars of European debt has added a new wrinkle to the sovereign default debate. In years past, when financial crises in Argentina and Russia left those countries unable to make good on their government debts, they simply defaulted.

But this time around, swaps and other sorts of contracts have become so common and so intertwined in the financial markets that there are fears among regulators and financial players about how a Greek default would play out among derivatives holders. The looming question is whether these contracts - which insure against possibilities like a Greek default - are concentrated in the hands of a few companies, and if these companies will be able to pay out billions of dollars to cover losses during a default. If there were a single company standing behind many of these contracts, that company would be akin to the American International Group of the euro crisis.

The US insurer needed a $182 billion federal bailout during the financial crisis because it had insured the performance of mortgage bonds through derivatives and couldn't pay on all of them. Even regulators seem unsure of whether a Greek default would reveal such concentrated risk in the hands of just a few companies. Spokeswomen for the central banks of both Europe and the United States would not say whether their researchers had studied holdings of such contracts among non-bank entities like insurance companies and hedge funds.

Asked about derivatives tied to Europe at a Wednesday press conference , Ben S Bernanke , the chairman of the Federal Reserve, said that the direct exposure is small but that "a disorderly default in one of those countries would no doubt roil financial markets globally. It would have a big impact on credit spreads, on stock prices and so on.

And so in that respect I think the effects in the United States would be quite significant." Derivatives traders and analysts are debating just how much money is involved in these derivatives and what sort of threat they pose to markets in Europe and the United States. On the one hand, just over $5 billion is tied up in credit-default swap contracts that will pay out if Greece defaults, according to Markit, a financial data firm based in London .

That's less than 1 per cent the size of Greece's economy , but that is a conservative calculation that counts protections banks have in place offsetting their positions , and is called the net exposure. The less conservative figure, the gross exposure, is $78.7 billion for Greece, according to Markit.

And there are many other types of contracts, like about $44 billion in other guarantees tied to Greece, according to the Bank of International Settlements. The gross exposure of the five most financially pressed EU countries - Portugal, Italy, Ireland , Greece and Spain - is about $616 billion. And the broader figure on all derivatives from those countries is unknown. The pervasiveness of these opaque contracts has complicated negotiations for European officials, and it underscores calls for more transparency in the derivatives market.

The uncertainty, financial analysts say, has led European officials to push for a "voluntary" bond financing solution that may sidestep a default, rather than the forced deals of other eras. "There's not any clarity here because people don't know," said Christopher Whalen, editor of The Institutional Risk Analyst. "This is why the Europeans came up with this ridiculous deal, because they don't know what's out there. They are afraid of a default. The industry is still refusing to provide the disclosure needed to understand this. They're holding us hostage. The Street doesn't want you to see what they've written."

Regulators are aware of this problem . Financial reform packages on both sides of the Atlantic mandated many changes to the derivatives market , and regulators around the globe are drafting new rules for these contracts that are meant to add transparency as well as security. But they are far from finished and could take years to put into effect. Darrell Duffie, a professor who has studied derivatives at the Graduate School of Business at Stanford University, said that he was concerned that regulators may not have adequately studied what contagion might occur among swaps holders, in the case of a Greek default.

Regulators, he said, "have access to everything they need to have. Whether they've collected all the information and analysed it is a different question. I worry because many of those leaders have said there's no way we're going to let Greece default. Does that mean they haven't had conversations about what happens if Greece defaults? Is their commitment so severe that they haven't had real discussions about it in the backrooms?" Regulators aren't saying much. When asked what data the Federal Reserve had collected on US financial companies and their swaps tied to European debt, Barbara Hagenbaugh, a spokeswoman, referred to a speech made by Bernanke, in May, in which he did not mention derivatives tied to Greece.

At the Wednesday press conference, Bernanke said that commonly cited data on derivatives do not take into account the offsetting positions banks have on their Greek exposures. And with those positions, he said, even if there is a Greek default, "the effects are very small" . At the European Central Bank, Eszter Miltenyi, a spokeswoman, said: "This is much too sensitive I think for us to have a conversation on this." On Wall Street, traders are debating whether the industry's process for unwinding credit-default swaps would run smoothly if Greece defaulted. The process is tightly controlled by a small group of bankers who meet in an industry group called the International Swaps and Derivatives Association.

The process is fairly well developed, but it has been little tested on the debt of countries. For the most part, Wall Street has cashed in on credit-default swaps tied to corporations' debt. For most purposes, determining whether a default occurred in a country's debt falls to ratings agencies like Fitch and Moody's . But for the derivatives market, a committee of ISDA makes the call.

If the committee decides there was a default, it passes the baton to Markit, which is partly owned by the banks. Markit holds an auction to determine the amount of value that has been lost on the debt, and that determines how much money is paid out to the parties that purchased the insurance. Marc Barrachin, who runs the auctions , said there was no reason to worry about the process. "We've had over 100 auctions since 2005," said Barrachin, the director of credit products at Markit.

"The process is very smooth, very well understood by market participants. I mean if you go back to 2008 right in the fall, in five days we had auctions for Fannie Mae , Freddie Mac and Lehman Brothers , and two weeks after that you had Washington Mutual. I go back to that period of stress and the orderly settlements of large amounts of credit derivatives, for names that were widely followed, were testament of the efficiency of the auction system."

In the case of AIG, there was not an unwind process run by ISDA because AIG's contracts were tied to mortgage bonds. Those sorts of derivatives pay out money over time, whereas derivatives tied to a country's debt pay out on one occasion: if a default occurs. That makes sovereign derivatives more similar to derivatives on corporate bonds and different in some ways from the situation at AIG. But the smoothness of the process would be irrelevant if the risk were concentrated in just a few weak institutions.

 

 

Source : ET

Is Greece Europe's Lehman?

The Greek financial crisis has reached atipping point. The Hellenic Republic's travails have been analysed ad nauseamfor two years now. Standard & Poor's rates Greece the riskiest sovereign credit in the world and Greek 10-year government bonds pay a yield of 17% - some 14% higher than in the US or Germany.

The Papandreou government has won vote of confidence on June 21, but austerity vote will be the difficult part. For ancient Greeks, centre of the world was Delphi, where an oracle foretold the future. For modern Greeks, focus is Syntagma, the square in central Athens where thousands mass daily to protest government austerity measures totalling 21% of Greece's GDP (in US GDP terms, this would be equivalent to $3 trillion of cuts and writeoffs). The IMF is blocking a critical 12-billion euro aid to Greece just weeks before it is due, since its policy prevents it from disbursing aid to a country that cannot pay its bills for next 12 months.

Eurozone finance ministers apprehend that under the current 110 billion euro bailout, Greece will run short again in March 2012. One option for Greece to pay for its debt is to print money and devalue its currency. But it cannot do so under EU covenants - talk is intensifying of Greece returning to the drachma.

If Greece successfully raises 30 billion euro from privatisation, its government debt would still equal about 150% of its GDP in 2014. Bulk of outstanding Greek debt would be in public hands - the troika of European governments, the European Central Bank and the IMF - and would presumably have seniority.

Remaining private sector holders would be squeezed into accepting greater haircut -an alarming prospect for the European financial system. Big banks, especially in Europe, have massive exposure to Greek debt. And just as Lehman's bankruptcy in September 2008 led to meltdowns at other big financial firms, the worry is that if Greece defaults, it could be the first proverbial sovereign domino to fall. Europe's other oinkers - Portugal, Italy , Ireland and Spain - may play the role of Merrill Lynch, AIG, Washington Mutual and Wachovia.

After Lehman, there was initial shock - but the collapse of stock, commodity and currency markets did not happen for a few weeks. What are the parallels this time? Markets think some form of Greek default is inevitable. If Greece cuts government spending, it will only succeed in reducing its tax revenues and making its debt harder to pay. The possibility of Greek default is rippling, Lehman-like, into unlikely places. When investors are nervous, they tend to seek refuge in the Swiss franc.

It was a good idea to take out mortgages denominated in Swiss francs when franc was stable, but once franc pushes upwards, it could result in double-dip housing recession in Europe. Today, franc is so overvalued that Swiss government last week downgraded its economic forecast, blaming its uncompetitive currency.
Besides, Moody's has warned of possible downgrades for French banks, which have greatest exposure to Greek bonds. That pushed down their share prices, while making it more expensive to borrow. AGreek default, then, would resonate far beyond Athens. The CBOE VIX index - measuring how much investors will pay to protect against stock market volatility - stands at 18.86: below its 25 on the eve of Lehman.

The euro has dropped by 5.3% against the dollar since its post-Lehman high; but remarkably, it is almost 20% stronger against the dollar than during the fears over Greece last summer. Despite appearances to the contrary, Greece need not be Europe's Lehman moment.

The fact that so many people think it will be, should offer protection against a financial disaster to match the meltdown of 2008. Only about $5 billion of net Greek CDs contracts have been registered through the Depository Trust and Clearing Corporation. While more over-the-counter contracts almost certainly lurk unregistered, this headline number is only about 1% of Greece's outstanding debt.

Bulk of final exposure can be traced to about 25 mainly European banks. In comparison, Lehman's list of counterparties and complex products was so vast that its administrators are still working out who owes what to whom. Europe is as prepared for a Greek default as it ever will be. It should also still be possible to negotiate a much more orderly default than the Lehman version.

Nevertheless, the risk of a Lehman moment in the eurozone remains. Greece is too small to matter, as is Ireland. But the contagion effect is raising Spain's and Italy's borrowing costs, and that hurts the euro. If panicked investors flee Spain, a $1.6-trillion economy, the country could prove too big to fail. The spread between 10-year Greek bonds and German bunds has gone from 460 bps after IMF programme was announced in May 2010 to 1,460 bps today. Same has happened to Ireland and Portugal.

More dangerously, even Spanish spreads have reached 270 bps. Greece, Ireland and Portugal have no chance of borrowing at affordable rates in the foreseeable future. There are signs investors are even distinguishing between the stronger sovereigns in Europe. The spread between French and German five-year bond yields has widened sharply, to 0.42% from 0.22% in early April.

History's greatest financial crises have had aftershocks. Europe's Lehman moment could be as likely centred around Spain or Italy, as Greece. The relief rally in global equities post-Greek confidence vote does not inspire confidence.

I expect event risks centred around Europe to surface once again, and this could result in heavy selling in global equity markets

Source: ET

America's rapidly growing national debt could soon spark a European-style crisis

America's rapidly growing national debt could soon spark a European-style crisis unless Congress moves forcefully, the Congressional Budget Office warned Wednesday in a study that underscores the stakes for a bipartisan group working on a plan to reduce red ink.

Republicans seized on the nonpartisan report to renew their push to reduce costs in federal benefit programs such as Medicare _ the federal government health care program that benefits the elderly.

At issue is the $9.7 trillion of U.S. debt held by investors and foreign countries like China, the measure that economists deem most important. Government accounts like the Social Security trust funds account for the rest of the $14.3 trillion total debt.

Democrats and Republicans have been stepping up budget talks aimed at averting what could be the disastrous first-ever default on U.S. government debt. A bipartisan group led by Vice President Joe Biden tasked with reaching an agreement has not made the politically difficult compromises on the larger issues, such as changes in Medicare, or tax increases.

The study reverberated throughout the Capital as Biden and negotiators and senior lawmakers spent several hours behind closed doors.

The talks are aimed at outlining about $2 trillion in deficit cuts over the next decade, part of an attempt to generate enough support in Congress to allow the Treasury to take on new borrowing.

Biden made no comment as he departed, except to say the group would meet again on Thursday and probably Friday as well.

The CBO, the nonpartisan agency that calculates the cost and economic impact of legislation and government policy, says the nation's rapidly growing debt burden increases the probability of a fiscal crisis in which investors lose faith in U.S. bonds and force policymakers to make drastic spending cuts or tax increases.

``As Congress debates the president's request for an increase in the statutory debt ceiling, the CBO warns of a more ominous credit cliff _ a sudden drop-off in our ability to borrow imposed by credit markets in a state of panic,'' said Republican House Budget Committee Chairman Paul Ryan.

The findings aren't dramatically new, but the budget office's analysis underscores the magnitude of the nation's fiscal problems as negotiators struggle to lift the current $14.3 trillion debt limit and avoid a first-ever, market-rattling default on U.S. obligations.

The Biden-led talks have proceeded slowly and are at a critical stage, as Democrats and Republicans remain at loggerheads over revenues and domestic programs like Medicare and Medicaid. Officials said little if any progress was made during Wednesday's session.


Source : ET

Fitch sees risk of Greece, US debt defaults

Fitch Ratings said on Tuesday that it would regard a voluntary rollover of Greece's sovereign bond maturities as a default and would cut the credit rating appropriately, keeping pressure on Athens ahead of a confidence vote in parliament.

The definitive comments weighed on the euro and underscored how much is at stake for Greece , which is struggling to implement a deeply unpopular fiscal austerity plan necessary to win the next tranche of emergency aid from the European Union and International Monetary Fund .

Fractious euro zone finance ministers are trying to patch together a second aid package for Greece, with more official loans and, for the first time, some sort of contribution by private investors who hold Greek government bonds.

"Fitch would regard such a debt exchange or voluntary debt rollover as a default event and would lead to the assignment of a default rating to Greece," Andrew Colquhoun, head of Asia-Pacific sovereign ratings with Fitch, said at a conference in Singapore.

A month ago Fitch downgraded Greece's credit rating three notches to "B+" and warned it could cut the rating further into junk territory. At the time, the rating agency said an extension of the maturity of existing bonds would be considered a default.

Standard & Poor's cut Greece's rating to "CCC" from "B" on June 13, and warned that any attempt to restructure the country's debt would be considered a default.

Moody's has a Caa1 rating to Greece's sovereign debt, which implies a 50 percent chance of a default within three to five years.

Fitch's Colquhoun also reiterated that the rating agency would place the U.S. sovereign rating on watch negative if Congress did not raise the federal government's borrowing ceiling by August 2, and said if the U.S. government misses an Aug. 15 coupon payment, then Fitch would place the rating on restricted default.

But it added it believed it was very likely that the debt ceiling would be raused and default would be avoided.

Fitch had made similar comments earlier this month and Moody's and S&P have issued warnings along the same lines. But Fitch was the first major ratings agency to say U.S. Treasury securities could be downgraded, even for a short period.

U.S. lawmakers working to rein in rising debt said on Monday they will have to make substantial progress this week to ensure the country retains its top-notch credit rating.

Source: ET

Tax exemption on postal savings account interest capped at Rs 3,500

You will now have to pay tax on interest earned beyond Rs 3,500 on a postal savings bank account. In a recent decision, the Central Board of Direct Taxes , the apex direct taxes body, withdrew the blanket exemption enjoyed hitherto by the scheme.

The exemption will be available only on interest earned up to Rs 3,500 in case of individual accounts and Rs 7,000 in case of joint accounts from the current fiscal year itself. Experts say some of the concessions granted earlier had to be reviewed to see if they were in line with the current economic reality or had outlived their utility.

"It's part of the government's initiative to widen the tax net," said Vikas Vasal, executive director, KPMG . He said the benefits also need to be evaluated to study their relevance. The exemption on the postal savings account was introduced in 1989.

With post office savings account coming under tax net, interest earned beyond the exemption limit will have to be added to a taxpayer's total income and tax paid accordingly. The current interest rates for Post Office savings deposits is 3.5% per annum. Investors can open this account with a minim deposit of Rs 50.

The maximum investment limit is Rs 1 lakh for an individual and Rs 2 lakhs in case of joint accounts. A government committee recently suggested bringing all postal saving schemes in tax deducted at source net under the new direct taxes code regime.

"This has been done at the behest of the department of post," said an income tax official. The finance ministry-appointed panel on small savings had also recently recommended removal of this exemption. The move also comes in the backdrop of concerns over people opening multiple accounts in different post offices in view of the investment threshold.

By capping the tax-free income and making reporting of such income mandatory, the income tax department would be able to effectively prevent any such misuse. At present, interest paid by banks in savings account is taxable and only postal savings account offered a tax-free interest income.

"The move is in line with the direct taxes code and creates a level playing field between the two,".

Source : ET

Investor interest: SEBI’s hands-off approach

First, the regulator’s moves caused dwindling market participation. Now, its plan to outsource complaints will further alienate it from investors

In one of the first decisions under UK Sinha’s tenure as chairman, the Securities and Exchange Board of India (SEBI) has reportedly decided to outsource its investor helpline service to a 500-seater third-party call centre.

This will be in addition to handing over the processing and maintenance of investor grievances to an outside agency. Is this a sign of improved efficiency or abdication of responsibility?

The preamble to the SEBI Act reads: “An Act to provide for the establishment of a Board to protect the interests of investors in securities and to promote the development of, and to regulate, the securities market and for matters connected therewith or incidental thereto.”

Clearly, investor protection is the first objective and market development and regulation functions arise from the first objective. How does the regulator protect investors if the job of interacting and engaging investors, hearing their issues, detecting patterns in investor complaints or a systemic issue is outsourced to call centres?

Ironically, the same media report says that SEBI does not want market intermediaries to outsource their core investor-sensitive functions.
Over the past two decades, SEBI’s biggest failure has been its  insensitivity to investors’ issues. It has not kept its ears close to the ground. Rather it has always framed policies in consultation with market players—investment bankers, large companies and their lawyers or accountants, overlaid by the wisdom of government officials.

This attitude follows a pattern: SEBI frames rules that cause hardship or losses to investors for several years; it acts only when the number of complaints is large enough or leads to litigation; often, this kneejerk action is extreme and causes further harm to investors.

Consider just three examples that Moneylife has focused on for six years: transmission of shares, power of attorney and the commission paid to distributors. In each case, SEBI acted long after the issue was brought to the attention of various SEBI chairmen. But SEBI’s action was too late to correct the systemic damage and erosion of investor confidence.

Moneylife has repeatedly pointed out that India’s investor population has declined from 20 million in 1992 (according to official reports) to just eight million (equity and mutual funds) according to the D Swarup Committee report 2009. This data never fails to startle policymakers, because we are fooled by the 20x increase in the Sensex, speculative trading turnover of over Rs1,00,000 crore a day, the 24x7 media coverage on stock markets and the increase in initial public offerings (IPOs), mutual fund schemes, etc. When confronted with the data, some seek a break-up; others want to know where investors are putting their money.

In fact, the details are available in official numbers. Bank deposits have increased from 32% of total household savings (RBI data) to 51% in 2007-08 (at the peak of the bull run). In contrast, investment in shares/debentures and units of Unit Trust of India has declined from 14% to 13% in the same period—despite the 20x rise in the Sensex and scores of mutual funds and public issues making their debut. The market has risen only on the back of foreign investment.

Indian investors have been steadily fleeing the market, despite the apparent spread of ‘equity cult’ and the government hasn’t even noticed. This will only get worse if SEBI decides to outsource its core function of listening to investor issues and resolving them.

Before SEBI hands out any outsourcing contracts, it must have a public discussion on the process of collating daily/weekly and monthly reports from these agencies.

These cannot be mechanical feedback about complaints and their redressal. The reports must flag all issues which have more than 10 complaints on the same subject or the same company/market intermediary. The reports must be made public and also placed before the SEBI board with an action plan followed up with an action-taken report.

The question is will the SEBI board, the finance ministry and the standing committee of Parliament on finance listen? It is interesting to contrast this with how the Reserve Bank of India (RBI) had drastically cut investor complaints during Dr YV Reddy’s tenure. He increased the number of banking ombudsmen; expanded the scope of issues they would handle; told banks that repeated complaints on the same issue would be treated as a class-action. His masterstroke was that he appointed serving RBI general managers to be ombudsmen. This ensures that a big swathe of RBI’s senior officials is personally sensitised to customer issues as well as banks’ perspective and that RBI has a better record of handling customer complaints than other financial regulators.

Source : MoneyLife

Are you ready to pay for guarantees?

Returns from these products mirror those from balanced and debt instruments; they also have limited features

To make sure that the money you invest comes back to you while you get to dabble into the markets sounds good. But there are a few costs that such a guarantee may entail—performance and features and in some even high charges. We found that out by scanning capital protection products among mutual funds and unit-linked insurance plans (Ulips). Read on to know whether they work for you.

Mutual funds

The highest that any capital protection fund has delivered in the last one year is just 5.88% (Franklin Templeton Capital Safety 5 Yrs), according to data from Value Research, a mutual funds tracker. The least was 3.09% (Sundaram Capital Protection Oriented Series I 5 Yrs).

Compare this with the rate of inflation for 2010-11, which has been above 9%, and your real rate of return turns negative. The real rate of return is the nominal rate of return minus the inflation rate. A 9% inflation rate means what you could buy for Rs. 100 a year back now costs Rs. 109, but your investments have returned only around Rs. 106, giving a negative return of
Rs 3.

Even bank fixed deposits (FDs) have fared better than capital protection funds over the past one year, though FDs’ real returns are in the negative zone, too. A year ago, banks were offering interest rates of around 6.5-7% for a year.

The trend is similar even on a longer time horizon of three years. Take a look at these figures: Franklin Templeton Capital returned 7.93% in the last three years, the highest among all capital protection funds. SBI Capital Protection Oriented Fund Series I clocked the least with 4.30%. An FD taken in June 2008 for three years would have given around 8.5-9.5% this year.

Why poor performance: In their bid to protect the investors’ initial capital, these funds predominantly—at least 70-80%—invest in bonds. The performance of bonds is inversely related to interest rates movement. In a rising interest rate scenario, bonds tend to perform badly. With the Reserve Bank of India (RBI) raising policy rates by 100 basis points in the last six months, bond performance has suffered, hitting capital protection funds in turn.

“Capital protection funds also invest part of their corpus in equities and since equities have hardly yielded any return in the last one year or so, that too has impacted the performance of these funds". These funds are closed-end and if you stay the course rather than exiting early, your returns would get better. You will have to pay an exit load if you leave the fund before its term and that may drag your return down.

Fees charged: The fee, or expense ratio, these funds charge are as per the industry standard—1.5-2% per annum.

Ulips

In Ulips, capital guarantee products became popular post 1 September 2010, when the regulator introduced cost caps on Ulips. While some Ulips promised to return all the premiums paid on maturity, it was the capital guarantee in the form of highest net asset value (NAV) that caught the fancy of investors.
Says Sanjeev Pujari, appointed actuary, SBI Life Insurance Co. Ltd: “Ulips giving highest NAV guarantee capital in the initial stages but when the fund value looks up it is the fund value that is guaranteed subsequently.” While the lure of highest NAV is strong, the fine print can change the story.

A capital guarantee fund within a Ulip has the flexibility to swing between equity and debt since their exposure to equity is 0-100%. The highest NAV guaranteed fund has the same flexibility—even as it may look like an equity fund, it is capable of turning completely into a debt fund in order to protect your capital. Usually in a bullish market, this plan will deliver on the mirage it creates: guaranteed return at the highest NAV of an equity fund. However, if the markets turn volatile the highest return is not of a fund that consists of only equity. To protect your upside in a volatile market, the insurer will lock in your gains in debt options. If the markets continue to fall, the insurer will shift more and more into debt, which gets reflected in your NAV.

Performance: As the markets continue to stay volatile and more money gets allocated to debt, the fund performance will mirror the returns of a balanced or a debt product, which will get reflected by a much sober NAV. Adds Pujari: “These are like balanced funds, but with no fixed asset allocation. Typically, the returns from these are similar to that of balanced funds.” The biggest risk here is that the entire corpus can get shifted to debt if the market crashes. It becomes difficult to move back to equity specially towards the end of the tenor as the focus then would be on preserving the highest NAV. While all this may sound a simple case of rejig the portfolio, the process is actually carried out by a complex software throwing out a constant debt-equity ratio.

Cost: It is not the returns alone that hurt. These plans charge you extra for offering the guarantee. Worse, there are no regulatory caps on how much the insurer can charge you. Mortality charge and charges on account of a guarantee are outside the regulatory caps purview. Depending on your age, the sum assured you choose and the charge for the guarantee, the advantage of a capital guarantee can actually turn against you.

Here’s an example: Canara HSBC Oriental Bank of Commerce Life Insurance Co. Ltd’s Insure Smart Plan is a 10-year term product that guarantees the highest NAV over the fund’s initial seven years. For this guarantee, it charges 0.35% per annum of the fund value; this is over and above the fund management charge. Assuming you pay Rs. 1 lakh for five years for a sum assured of Rs. 15 lakh—it has a limited premium paying term—and your fund grows at 10%, the plan will return around Rs. 8.3 lakh: a return of 6.45% in 10 years. According to the regulator, the difference between the gross yield and the net yield can’t be more than 3 percentage points, but here the returns have come down on account of the cost on guarantee, which is not within the regulatory caps.

Features: A Ulip offering any kind of capital guarantee typically does so only on maturity. So in case you wish to surrender your policy or in case of death, the guarantee will not be available. Also, these policies come for shorter terms, usually 10 years, and with a limited sum assured to help the insurer manage the guarantee.

Our Advice to all the Investors : 

Capital guarantee products are for risk-averse investors. But even in the conservative and safer investment stable, there are better products to use. There is Public Provident Fund that gives 8% risk-free return, though its horizon is 15 years. For shorter duration, you could consider fixed deposits if you are in the lower tax bracket. With returns on one-year commercial papers around 10.5% as on 13 June, you can easily earn around 9.5-10% in fixed maturity plans.

But if you can stomach some risk, then investing in equity over at least 10 years will automatically insulate your capital. You can choose a mutual fund with a good performance track record. In the long-term, equities tend to be less volatile and give returns that leave inflation behind by a comfortable margin.

Source : Livemint

Seven factors that can impact your wealth creation

The Indian stock markets, along with other emerging markets and commodities, have recovered from the recent lows. However, analysts warn that the markets will face more headwinds (global and domestic) in the near future and are expected to remain volatile in the next couple of months.
Go through these factors to find how they can impact the stock performance and, in turn, affect your investments.

Money flow from the US :

The US Federal Reserve's quantitative easing programme (commonly known as QE2) is coming to an end on June 30. The 2010 rally in the commodities and emerging markets was largely due to funds flowing in from QE2. These markets can correct sharply if the US does not launch the next stimulus programme (QE3). Analysts are not too hopeful.

"The QE3 is unlikely unless the US economy slows much more than what the consensus is currently expecting," says yotivardhan Jaipuria, Head (India Research), Bank of America Merrill Lynch. "QE3 may not start soon because there is enough liquidity in the global market now. Japan has also pumped in liquidity after the earthquake and tsunami," says Girish Nadkarni, executive director and Head (ECM) of Avendus Capital.

The end of QE2 is likely to have a negative reaction but analysts feel that it won't be very drastic for the Indian markets. "With net FII outflows on a year to date basis, I think the risk of a market crash (Nifty crashing below 4800) due to the stoppage of QE2 is relatively limited (less than 20% probability)," says Parul Saini, Executive Director, RBS Asia Securities. "After the initial reaction, investors are going to distinguish between commodity producers and commodity users like India," says Jaipuria. A correction in commodities is likely to be good for user countries like India.

Euro debt crisis :

Things are far from rosy in Greece. The 10-year bond yield has already hit 16%, double the level at the time of the first bail out. The two-year yield has crossed the 26% mark recently, a huge burden no country can afford to pay.

Banks and governments are trying to prevent the Euro region's first sovereign default and the final decision is expected at a summit on June 23-24.
While everyone agrees that Greece needs another bail out, other nations are not that forthcoming now, especially to solutions that impose additional cost on their taxpayers. The other option is a planned default, which will create turmoil across the globe. Moody's Investors Service has downgraded Greece's debt from B1 to Caa1, putting it on a par with Cuba, and raised Greece's risk of default to 50%. Any default by Greece will pull down all risky assets such as stocks in emerging markets, including India.

Middle-East crisis:

Though it has subsided a bit, there is a possibility of another wave of unrest hitting new nations once there is a regime change either in Libya or in Yemen. If the strife spreads to other oil producing countries, it will push up oil prices further.

Importing countries like India will be the worst affected. The crisis has forced the region's other rulers to spend tens of billions of dollars to redress public grievances. To cover these additional costs, energy producers have to squeeze more money from their oil fields. This means raising their break-even price, the money they must make from each barrel of oil, to avoid fiscal deficits.
Producers' rising break-even points also have profound implications for major oil importing countries like India. That explains why most analysts are expecting the oil to remain at these elevated levels in future. Can it spike from current levels again? Yes, but only for short term, because it will affect the global growth.

"High oil prices and global recovery can't happen together, one has to give in," says Nadkarni. "From a medium to long term perspective, it is in the interests of oil producers to ensure that supply shocks don't have a significant impact on global growth, as that would lead to lower demand for oil in the future," explains Sukumar Rajah, managing director and CIO, Asian equities, Franklin Templeton Investments.

With some stability coming to the markets, investors have started assuming that everything is fine and the same is getting reflected in the CBOE Volatility Index. The index, which is also referred to as the global fears index, is close to its four-year low. That means, any of the events mentioned above can spike the risk aversion, sending the commodities and emerging markets into a tailspin.

Weakening growth :

Apart from these global factors, there are also some domestic factors at work. Though the Indian stock market ignored the lower than expected GDP growth rate for Jan-Mar 2011 period, economists warn about more growth pain in the coming quarters. "The sub-8% GDP growth is expected to continue in the first half of fiscal year 2012," says Rohini Malkani, economist, Citi India.

"With higher rates, increasing oil prices, and the impact on capex, we expect the GDP growth to slow further to 7.5% in 2011-12," says Tushar Poddar, Chief India Economist, Goldman Sachs. The data for the April-June quarter is also showing a weakening trend.

The HSBC- Markit purchase manager's index (PMI) fell from 58 in April to 57.5 in May, lowest level since it hit 56.8 in January. A reading above 50 indicates expansion while anything below it implies contraction. The wholesale auto numbers for the month of May also show a slowdown in growth.


Rising interest rates :

Stock market shrugged off the lower than expected GDP numbers, because of the hope that lesser growth may force RBI not to go for the next hike in the upcoming policy review meeting.

However, economists still believe that RBI will continue with its rate hikes.

"Even though economic activity is slowing, we think that inflationary pressures will keep the RBI in a tightening mode and we continue to expect a 25 basis point rate hike on June 16," says Poddar. The general consensus is that the RBI will hike rates by another 75 basis points (including the 25 basis point rate hike expected on June 16).

Earnings downgrades :

Stock analysts are also aggressively reducing their earnings estimate for the next financial year. For example, the consensus earnings estimate for the Sensex in 2011-12 came down further to Rs 1,243.70 (compared to Rs 1,255 on May 20) and the same is expected to fall further to Rs 1,200 levels in the coming months.

Should investors bother about the earnings downgrades and rising interest rates because the market's one-year forward P/E is close to its long-term average? Yes. "In a period of earnings downgrades and rising rates, there is a tendency for the market to go below the historical average multiples," says Jaipuria.

Monsoon :

The monsoon hit the Indian mainland on May 29, two days ahead of its schedule on June 1 and the stock market has responded well to it by notching good returns since then. However, there are worries that pre-monsoon showers cooling the interiors can affect the wind patterns and, therefore, can affect the spread of monsoon, especially to the interior region. This fear explains why most analysts predicting the 2011-12 GDP growth have set a good monsoon as a pre-condition.

"Our 8.1% 2011-12 GDP estimates rests on normal monsoons and an investment pick-up. A less than favourable monsoon could result in agri growth being flat over 2010-11 levels and consequently bring down the headline GDP to 7.6%," says Rohini Malkani, Economist, Citi India.

What you should do ?

Stay in cash: Since the market is expected to remain volatile in the coming months, the best strategy is to increase the cash level in the portfolio.

Stick to large-caps: Restrict investments to large-cap-dedicated mutual fund schemes. These will not be as volatile as mid-cap schemes.

Invest gradually: Make sure you don't invest all your surplus at one go just because the market slips one day. The interest rate-sensitive sectors like real estate, financial services, auto, etc., have a significant weight in the major indices like the Sensex and the Nifty and will exert pressure on them.
Buy defensive sectors: Restrict investments to defensive sectors like FMCG, pharma, etc.

Avoid interest rate sensitives: Stay away from interest sensitive sectors like real estate, banking and auto. They are expected to be under pressure till the inflation and interest rate hike cycles peak out.

BSE allows trading in 135 more stocks in F&O

The Bombay Stock Exchange (BSE) will add 135 stocks to its futures and options segment from August 2011, following a recent regulatory move to allow bourses to offer incentives to brokers for generating volumes in illiquid derivatives contracts. The step has raised hopes of reviving the BSE's near-dormant F&O segment.

"With recent positive developments designed to augment trading in F&O, we are working towards making the BSE market-ready for increased participation in our equity derivatives business," said the exchange's CEO, Madhu Kannan, in a release.

The BSE has 84 stocks in addition to a few indices in its F&O segment, which clocked an average daily turnover of Rs 18 crore in the past one month. In comparison, the NSE's average daily turnover was Rs 1 lakh crore in the period.

Brokers said the so-called liquidity enhancement scheme presents an opportunity for the BSE to capture a portion of its rival's dominant market share.

"The chance of a revival of the BSE's equity derivatives segment has been enchanced 100-fold after the introduction of the liquidity enhancement scheme," said Rajesh Baheti, MD, Crosseas Capital. "Though the scheme may not be a success immediately, it is certainly promising as liquidity begets liquidity," he said. Brokers said even the NSE may benefit from the liquidity enhancement schemes.


Source : ET

Small saving may fetch you returns as high as 8.2%

The government is likely to raise returns on small savings schemes such as public provident fund (PPF) over the next two-three months with sharpest rise of up to 70 basis points likely in post office deposits.

Based on present calculations PPF, the most popular scheme, would see interest rate rise by 20 basis points (100 basis points = one percentage point) to 8.2% annually instead of 8% now while senior citizens can hope to get 8.95%

The only scheme which is going be hit would be the five-year Senior Citizen's Savings Scheme (SCSS), where the return is expected to decline by 30 basis points.

A government panel headed by Reserve Bank of India deputy governor Shyamala Gopinath submitted its report to finance minister Pranab Mukherjee . The panel has called for several changes in the structure of small savings schemes and has recommended abolition of Kisan Vikas Patra as well as raising the investment limit in the PPF scheme to Rs 100,000 from the present Rs 70,000.

In case of two other schemes - the Monthly Income Scheme ( MIS )) and the National Savings Certificate (NSC) - the rates would remain the same but their tenure would be cut from six years to five.

The rates would be applicable if the new formula, which is linked to the three-year average rate on comparable government bond, is applicable from July 1.

A senior government official told TOI that in case of schemes such as NSC, the interest rate on offer would be the one applicable in the year of purchase. So, if you invest Rs 1 lakh in NSC now, you would get 8% but it could rise to, say, 8.5% for those purchased in the next financial year.

The interest rate payable on PPF would, however, be fixed at the start of every financial year and the entire corpus would be entitled to the same rate, as is the case with your money lying with the Employees Provident Fund Organisation.

Though the government would take a hit of around Rs 650 crore due to the revamp - which also involves resetting interest rates for state governments that use bulk of the proceeds - the finance ministry is keen to move to the new mechanism at the earliest. "It's more transparent and offers benefits of the rising interest rate environment," said an official.

With most states already on board, the potential risk of derailment is unlikely, the official said. Besides, the government does not expect any political opposition as the returns are rising for almost all schemes.

The official said the panel had consulted all stakeholders and the panel included the finance secretaries of West Bengal and Maharashtra. "The recommendations will be discussed in the government and we can implement it in the next 2-3 months," said the official, who did not wish to be identified. Recommendations of a similar panel had to be forwarded to the National Development Council (NDC) as some states had protested against the proposed changes.

"The present recommendations benefit investors. We are also cutting down on agents' commission. Overall, the recommendations are balanced and links the interest rates to market rates. We don't anticipate any opposition," the official said.


Source : ET

Citigroup confirms data breach at Citi Account Online

Citigroup Inc confirmed a computer breach at Citi Account Online, giving hackers access to the data of hundreds of thousands of bank card customers.

The bank recently discovered unauthorized access at Citi Account Online through routine monitoring, a spokesperson told Reuters in an email.

The bank said about 1 per cent of its card customers were affected by the breach.

The name of the customers, account numbers and contact information including email addresses of the affected accounts were viewed, Citi said.

Other information such as birth dates, social security numbers, card expiration date and card security code (CVV) was not compromised, Citi said.

"We are contacting customers whose information was impacted. Citi has implemented enhanced procedures to prevent a recurrence of this type of event," the spokesperson said.


Source : ET

US default would be dangerous; Fitch may cut rating: Fed

A US default would have severe reverberations in global markets, a top Federal Reserve official said just hours after Fitch Ratings warned it could slash US credit ratings if the government misses bond payments.

St. Louis Federal Reserve Bank President James Bullard told media on Wednesday "the US fiscal situation, if not handled correctly, could turn into a global macro shock."

"The idea that the US could threaten to default is a dangerous one," he said in an interview.

"The reverberations in those global markets would be very severe. That's where the real risk comes in," Bullard warned.

Some Republican lawmakers have said a brief default, which would be inevitable in August if lawmakers fail to raise the nation's $14.3 trillion debt ceiling, might be acceptable if it forces the White House to deal with large budget deficits.

Bullard's warning came just after Fitch said it would slash to "junk" the ratings on all US Treasury securities, seen worldwide as a risk-free investment, if the government misses debt payments by Aug. 15.

The ratings would go back up once the government fulfils its debt obligations, but probably not to the current AAA level, Fitch said, in a stark statement about the impact of even a short-lived default on the US credit-worthiness.

"The notion of flirting with a default on existing obligations flirts with irresponsibility," Richard Bernstein, chief executive of Richard Bernstein Capital Management LLC, said at the Reuters 2011 Investment Outlook Summit in New York.

The White House said Fitch's warning makes it clear that "there is no alternative to raising the debt ceiling."

"This is not about additional spending, this is about honoring the obligations the United States government has made," White House press secretary Jay Carney told a daily briefing.

Moody's and Standard and Poor's have issued similar warnings. But Fitch was the first among the big-three rating agencies to say US Treasury securities could be downgraded, even for a short period, to a non-investment grade.

The agency said even a short-lived default, also called a technical default, "would suggest a crisis of governance from a sovereign credit and rating perspective."

"Clearly the political signals which are coming (from Washington) are a source of concern," David Riley, head of sovereign ratings at Fitch, told Reuters in an interview.

He added, however, that the agency still believes lawmakers will eventually reach an agreement on the debt ceiling.

"We know from previous experiences -- both with the government shutdown and previous episodes with the debt ceiling -- that although you get a lot of brinkmanship, ultimately it does get resolved," Riley said.

President Barack Obama is trying to win congressional approval to raise the nation's legal debt ceiling before an Aug. 2 deadline.

The Treasury Department said on Wednesday the Fitch warning was "another stark reminder" of the need for Congress to act quickly.


Source : ET

Government panel for end to Kisan Vikas Patras, calls for NSC maturity in 5 years

A government panel, set up to review the small investment schemes of post offices and banks, has recommended discontinuation of the popular Kisan Vikas Patra, among other changes.

The committee has also proposed a 0.5% raise in the interest rate for post office savings account to 4%, reduction in the maturity period of National Savings Certificates (NSCs) to five years from six, and raising the annual contribution limit in Public Provident Fund ( PPF )) toRs 1 lakh, from the current Rs 70,000.

The panel, headed by Reserve Bank of India (RBI) deputy governor Shyamala Gopinath, submitted its report to the finance minister on Wednesday, a finance ministry statement said.

The proposals are in line with the suggestions made by experts, the RBI and commercial banks to ensure transparency, have market-linked rates, and reform the small savings plans offered by the government.

If the proposals are accepted, it could lead to big changes in the way the National Small Savings Fund (NSSF) is managed and the returns it generates for investors.

The finance ministry had formed the panel after it accepted the recommendations of the 13th Finance Commission to examine all aspects of the National Small Savings Fund.

To address the need for a long-term investment instrument, it has recommended introduction of a 10-year NSC scheme. The panel has also adviced benchmarking of interest rates on other small savings schemes to rates of government securities of similar maturity with positive spread of 25 basis points with two exceptions.

The first is 100 basis points spread for senior citizens' schemes, keeping in view its social objective, and the second is 50 basis points spread for the recommended 10-year NSC, keeping in view of its higher illiquidity.

These rates may be notified by the government afresh at the beginning of every financial year based on the average yields on government securities in the previous calendar year.

Bankers say the recommendations are in the right direction. "We will have to study them in detail, but it certainly looks like a first step in the right direction," said RK Bansal, executive director, IDBI Bank .

The committee has proposed that the mandatory component of investment of net small savings collections in state government securities be reduced to 50%. States can access up to 80% of NSSF for financing their annual expenditure.

The funds are given as a 25-year loan carrying 9.5% interest, higher than rates at which states can borrow from the market.

The balance amount could either be invested in central government securities or could be on-lent to other states on basis of requirement or could be lent for financing infrastructure projects requiring long-term finance, according to the panel.

It has been proposed that the tenure of these loans may be reduced from the current 25 years, including moratorium of 5 years, to 10 years.

Source : ET

Post Office savings bank deposits likely to fetch 4% interest

A government committee has suggested raising interest rates on Post Office savings bank deposits to four per cent, a suggestion that could benefit lakhs of small depositors.

The Committee on Small Savings also recommended linking returns on other small savings schemes with interest rates on government securities.

It has also suggested that Kisan Vikas Patra (KVP) be withdrawn and annual investment limit for the popular Public Provident Fund (PPF) be raised to Rs 1 lakh from Rs 70,000 at present.

The committee recommended that interest rates for Post Office savings deposits be raised to four per cent from 3.5 per cent at present, in line with the Reserve Bank's decision to hike rates on savings bank deposits.

Under the new formula, suggested by the committee headed by RBI Deputy Governor Shyamala Gopinath, small savings schemes would provide better returns to investors.

Interest rate for one-year deposit scheme would go up to 6.8 per cent from 6.25 per cent, while returns for the PPF would improve to 8.2 per cent from 8 per cent.

With regard to taxing returns on the small savings schemes, the committee said the issue should be considered by the government while firming up the Direct Taxes Code ( DTC )), which seeks to replace the Income Tax Act, 1961.

Noting that the small savings schemes are agent-driven, the committee suggested that the commission on them should be gradually reduced from four per cent to one per cent.


Source : ET

Moody's sounds alarm over US debt limit, deficits

Ratings agency Moody's warned on Thursday it would consider cutting the United States' coveted top-notch credit rating if the White House and Congress do not make progress by mid-July in talks to raise the U.S. debt limit.

Treasury Secretary Timothy Geithner , seeking to convince Congress to increase his borrowing authority and prevent a government default, went to Capitol Hill to press his case in a 45-minute meeting with first-term lawmakers.

"I am confident that two things are going to happen this summer," Geithner told reporters after the meeting. "One is that we are going to avoid a default crisis and we are going to reach agreement on a long-term fiscal plan."

The meeting occurred just hours after Moody's Investors warned that slow-moving deficit talks led by Vice President Joe Biden , hindered by entrenched positions on both sides, had increased the odds of a short-lived default by Washington.

Moody's warning increases pressure on President Barack Obama and House of Representatives Speaker John Boehner, the top Republican in the U.S. Congress, to strike a deal soon or risk upsetting global financial markets.

Geithner has predicted a financial catastrophe if Congress fails to increase the current $14.3 trillion borrowing cap by Aug. 2, when his department will exhaust the extraordinary cash management measures it has been using since reaching the debt limit on May 16.

Geithner said he had a "good meeting" with the first-term lawmakers, but some of the skeptical Republicans, who oppose increasing the debt limit without implementing deep spending cuts, were less pleased.

"It is frustrating when the secretary talks in circles and that is very unfortunate," said Representative Stephen Lee Fincher. "We are all big boys and girls. We need a framework put forward and we are not seeing that out of this administration, only seeing talk, talk and talk."

Representative Kristi Noem, a favorite of the fiscally conservative Tea Party movement, said the freshmen Republicans made it clear to Geithner that they would not "give this administration a blank check to spend even more."

"Secretary Geithner doesn't get it," said Noem, one of the "mama grizzlies" touted by ex-Alaska Governor Sarah Palin.

But a Treasury official characterized the talks with lawmakers as friendly and constructive.

POLITICAL GRANDSTANDING Saying the risk of "continuing stalemate" between the two sides had grown, Moody's urged progress on deficit reduction soon before politics takes over in the run-up to the November 2012 presidential election.

"We think this is an opportunity," Steven Hess, sovereign credit analyst for Moody's, told Reuters. "If this opportunity goes by without them realizing a serious long-term debt/deficit reduction program, then we think that until the presidential election, the chances of such an agreement are really much reduced."

Mary Miller, a top Treasury official, said the Moody's statement underscored the need for Congress to move quickly to make sure the United States could meet all its debt obligations while working to reach a long-term fiscal deal.

A U.S. default would roil global financial markets, but few investors are rattled just yet. Wall Street, in large part, expects the debt and deficit negotiations to go down to the wire, as did talks over tax cuts and the 2011 budget.

"We've been through this political grandstanding before," said Jim Kochan, chief fixed-income strategist at Wells Fargo Advantage Funds.

"We always go right down to the day on debt ceiling targets being raised. No congressman and no president wants to be responsible for Social Security payments not going out. This is a minimal risk. We've seen this so many times."

Obama has tasked Biden to lead negotiations with Republican and Democratic lawmakers to find a deficit-reduction deal that would be palatable to Congress and pave the way for the debt limit to be raised. Their talks are due to resume on June 9.

But Republicans refuse to consider tax increases as part of a deal, while Democrats are opposed to Republican proposals to scale back the popular government-run Medicare healthcare program for future retirees.

Republicans seized on the announcement by Moody's, which comes two months after Standard & Poor's revised down its credit outlook on the U.S. rating, as proof of the need to make some sharp spending cuts.

"This report makes clear that if we let this opportunity pass without real deficit reduction, America's financial standing will be at risk," said Boehner. "A credible agreement means the spending cuts must exceed the debt limit increase.

Senator Charles Schumer, a top Democrat, said a compromise that prevents a "catastrophic default on our obligations and significantly reduces the debt is within reach."
Source: ET

Finance ministry initiates strict monitoring of expenditure

The finance ministry has initiated strict monitoring of expenditure and has asked ministries and departments to stay within their allocation for the current financial year in an attempt to ensure that fiscal targets for the year are not breached.

"We are keeping a close watch on expenditure," a finance ministry official told ET.

As a part of the exercise, the finance ministry has asked all ministries and departments to remain within budgeted expenses and not to bring out any new scheme, the official added.

Though no austerity measures are being contemplated, the message from the North Block to ministries and departments is clear that it would encourage only prudent spending.

"The entire exercise is aimed at ensuring that there is no slippage in the fiscal deficit target of 4.6% of GDP for 2011-12," the official said. Finance minister Pranab Mukherjee himself is keen to ensure that government's expenditure management does not go awry, having repeatedly said that the fiscal deficit target of 4.6% of GDP will be adhered to.

A strict monitoring at the beginning of the financial year itself will prevent any unplanned rise in expenditure and help the government meet its target of 4.6% fiscal deficit.

The government contained its fiscal deficit, the gap between overall expenditure and receipts, at 4.7% of GDP during 2010-11 much lower than the revised estimate of 5.1%.

However, experts say the task is more challenging in the current financial year.

"It (achieving 4.6% fiscal deficit target) is going to be very difficult in the current financial year as growth is expected to moderate and oil prices continue to remain high," said D K Joshi , chief economist, Crisil.

"We see gathering risks to the budget deficit target of 4.6% of GDP for FY11-12," wrote Deutsche Bank economist Taimur Baig in a note on May 24.

Source : ET