India’s budget: NRIs wake up and smell the coffee (Comment)

February 28th, 2010 - 2:41 pm ICT by IANS  

By Kul Bhushan
India’s budget yet again demonstrates to NRIs that investing in their homeland is probably the best option right now. The West is still struggling to climb out of one of its deepest recessions and provides low returns, while India’s growth story promises healthy returns. Surely, it’s time to wake up and smell the Indian coffee.

Soon after the budget was read, the Indian stock exchange gave it a thumbs up sign without delay as the market climbed up by a hefty 175 points. The return on Indian equities in the past year has been calculated at 87.4 percent by The Times of India. If an NRI invested in real estate stocks for the last year, the returns would be a whopping 139 percent! The auto sector was not far behind as the returns on wheels was 184 percent. Again, consumer durables and the IT sector would have raked in returns at 150 percent and 125 percent respectively. Now, where would an NRI get his investment almost doubled in one year?

As far as returns on fixed deposits are concerned, NRIs can reap much higher returns of eight percent for term deposits if they convert their currencies into Indian rupees. This compares with two to three percent when they keep their funds in hard currencies in India or abroad. Considering that over 100 banks have failed in the US following the meltdown and a number of British banks were also shaken, NRIs hastily sent their savings to India and the country’s foreign exchange reserves are hovering at a bulging $280 billion now.

The secret for sweeping this bonanza lies in having full faith in the strength of the Indian economy just after the financial meltdown in late 2008 when the Indian stock market had a kneejerk recoil and slumped to around 8000. But it recovered in early 2009 and the results are now clearly visible as the market stands at 16,430 points - almost doubling in one year. After the initial whiplash of the Western financial debacle, the Indian markets started to recover from January 2009. Basically, this is due to the inherent strength of the domestic demand, the conservative economic policy and tight financial regulation.

In the economic report card for the year, the Indian finance minister announced that the economy is growing at a healthy 7.2 percent - one of the highest in the world. Except for agriculture, most sectors are doing well. Unlike most Western economies, India has begun to withdraw the stimulus.

Commented an NRI chartered accountant, S.K. Gupta: “A clear message has been given to the world at large about India’s economic progress by expanding tax bands, thus lowering income tax. It conveys that India’s spending power has increased a lot.

“One of my clients, Rahul Jaiswal, an Australian citizen earning over $200,000 (combined with his wife’s income), has decided to accept a job as president in Chennai with an international water treatment company. He told me he had a better future in India than in Australia.”

NRIs will also benefit from the lowering of income tax rates announced in this budget if they file their returns in India. The norms for FDI (foreign direct investment) have also been eased and streamlined in this budget. NRIs are buying properties in India after the 2008 meltdown for rent or for use during retirement. Lack of job security in the West and lower prices in India are major factors.

From 2003 onwards, property prices rocketed as the economy boomed. In many cases, prime property in major towns rose over three or four times, making them out of reach for most overseas Indians. A small house in a small city in India would cost them more than a condo in Florida. Indian property prices stablised in late 2008 as many developers had started real estate projects targeted at high income owners. When the buyers vanished, the prices came down by 50 percent in early 2009. By mid-2009, NRIs began to buy again.

So with all these goodies, where are the hurdles for NRI investment? Lots of paperwork. First, obtain a PAN or Permanent Account Number. This 10-digit number, issued by the Income Tax Department, is essential for all investments whether an NRI pays income tax or not. To invest in direct equities, NRIs need to obtain prior permission from the Reserve Bank of India that a broker can obtain. Then you open a Demat or ‘dematerialised’ account for holding and trading shares. To invest in mutual funds, an NRI needs a PAN Card and complete the KYC or ‘Know Your Customer’ process. This paper chase takes about three months. Despite this red tape, has the aroma of Indian coffee tempted you?

(28-02-2010- The author previously worked abroad as a newspaper editor and has travelled to over 55 countries. He lives in New Delhi and can be contacted at kulbhushan2040@gmail.com)

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