Friday, Nov 28, 2014

Own goal policies, uniquely Indian

The Indian fund manager pays a 30 per cent tax on his management fees, as he should. And the foreign investor is obligated to pay the fund managers a 30 per cent tax, which he does not. The Indian fund manager pays a 30 per cent tax on his management fees, as he should. And the foreign investor is obligated to pay the fund managers a 30 per cent tax, which he does not.
Written by Surjit S Bhalla | Posted: July 1, 2014 12:05 am

The Narendra Modi government came to power on the promise of a new beginning for the economy, a beginning that will change the mindset of the licence raj socialism that has invaded and pervaded the Indian economy and financial markets. Tragically, the two most controlled sectors of the Indian economy are also the two important growth poles — agriculture and financial markets.

Not so long ago, circa 2006, there was much official GOI talk of Mumbai becoming a financial centre. This talk died down along with GDP growth under UPA 2. The Modi government has signalled that its top priority is the generation of economic growth and the provision of jobs to a job-starved population, especially the young. There is talk of reviving the manufacturing sector, which has been stagnant at 15 per cent of the GDP for as long as most people can remember. India has survived, to date, because of exceptional growth in the services sector. Job growth in future will have to come from both manufacturing and services.

It is likely that history will remember Prime Minister Modi as not only the most astute and formidable politician that India has ever produced but also perhaps as the luckiest one. To achieve his goals, and fulfil his promises, Modi needs to get growth to happen. Sustainable growth, of India’s potential of 8 per cent growth, will involve some right decisions, but it is not clear that the decisions will necessarily have to be tough ones. The luck part comes from the fact that inappropriate and bad policies in the past have generated a lot of low-hanging growth fruit, which can be easily plucked. Actually, forget the low-hanging fruit, there is so much fruit on the ground rotting away and waiting to be salvaged.

One such rotting fruit is India’s legislation and policies regarding investment in the stock market. In today’s globalised world, legitimate international capital should, and will, flow to those countries that provide the highest and safest returns to the individual investor. Part of the returns is the “cost of doing business”, an item that Modi has said he wants to reduce.

At present, the ease of doing business in the US (or practically any other country) is as follows. Anybody can enter their financial market, subject to know-your-client (KYC) norms. Indeed, even an Indian can do so (and does so), subject to constraints imposed by the RBI (no more than $1,25,000 per person per year). But what if “Mr John Doe” from America wants to invest continued…

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