By – Mr. Jayant Manglik, President of Retail Distribution at Religare Securities Limited
This budget can be magic for investors if the government takes suitable steps in the equity and commodity markets aiming to become the South Asian financial hub. We have the size and the gravitas, now we need ease of doing business. This will truly be a ‘made-in-India’ achievement and the budget can help move quickly in that direction with some objective steps. Of course, taxes levied on salaried individuals as well as corporates should be rationalized so that there is more money in the hands of the earner and therefore more money to invest to secure the future. But it is equally important that the investor is a participant in India’s growth story. Without doubt equity markets will be an important avenue towards this as the growth will be funded by equity and debt. I would add four specific asks from this budget.
The first item is to decrease STT (Securities Transaction Tax) so that we are not losing business to the likes of Singapore where Nifty is actively traded due to low transaction costs. Lowering STT to reasonable levels will go a long way in promoting active equity markets with better retail participation.
The second component is that benefits should be indexed to inflation e.g. the medical limit is Rs 15,000 for a long time. Auto-indexation will also mean more money in the hands of the tax payer, some of which could well come towards equity investments. In any case, it is a logical demand.
The third ask is very important – a revamped RGESS which will promote equity culture not only among first-timers but also among those who have simply stopped participating in the markets. Any western country with a market-based economy has healthy capital markets which are nurtured to provide avenues for efficient capital formation and allocation. Our future growth, which will be funded by equity and debt, may well depend on this.
The fourth piece is regarding whispers that the 1 year lock-in for 0% capital gains tax will be increased to 3 years. This should not even be considered. It will be a very retrograde step which will wipe out years of market-improving mechanics in one stroke.
On the commodities front, the announcement of the Sebi-FMC merger in the last budget gave a policy boost to commodity markets. An empowered regulator and the introduction of commodity derivatives under the definition of securities in the SCRA are bold moves to drive commodity markets growth. The forthcoming budget can take this to its logical conclusion by addressing three key issues.
The first, and most important, is the matter of CTT (Commodities Transaction Tax). Since it was levied, exchange volumes have fallen by 60% leading to low liquidity and making it difficult for the market to meet its key objectives of price discovery and efficient risk mitigation. It has also encouraged ‘dabba’ trading, variously estimated to be between 3 and 10 times of exchange volumes – and generating negative revenue to government in addition to allied social ills. Additionally, business has moved abroad e.g. rupee-denominated gold contracts have been launched by a Dubai-based exchange, obviously with no CTT. Making CTT near-zero for now will result in instant growth in the commodities markets.
The second element is that of allowing new participants and new products to bring the industry on par with the best commodity exchanges in the world. Banks should be allowed to participate as they have commodity exposure through their lending book. Likewise mutual funds, domestic and foreign institutional investors will bring much-needed expertise and depth to the markets. To attract this new set of participants, new products like options and indices are necessary so that they can trade, invest or hedge efficiently.
The third point is the mandatory disclosure of corporate positions on commodity exchanges. This can first be done for PSUs and publicly listed corporates so that they can efficiently manage company as well as shareholder risk. It will also result in increased transparency and better corporate governance. A similar move was implemented for currency hedging a couple of budgets ago.
Additionally, agricultural insurance, warehousing and financing have to be addressed so that there is no distress sale by farmers. Investments in the agricultural sector must go up sharply to increase crop productivity and lower farmer dependence on monsoons while lowering the cost for the end-consumer. Also, industry status to the broking industry will assure better access to bank funding and aid its plans to make India a price-setter in the commodities in which we are a large producer or consumer.
Therefore see this Budget as a landmark opportunity for the development of equity and commodity markets in India.
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