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Journalism of Courage
The verdict seems clear from the stock indices. A 144-point post-budget rally that began after P. Chidambaram uttered the last word of his long budget speech is clearly a ‘relieved’ rally.
The past couple of weeks had seen the capital market turn nervous at the aggressive posturing of the government’s political allies, but the FM has done an good job of managing various expectations, contradictions and compulsions. The compromises are also obvious. The Disinvestment word was avoided and inflammable issues such as increased Foreign Direct Investment were relegated to the examination to ‘high level’ committees.
Still, barring nasty surprises in the fine print, investors have much to be relieved about. There was no hike in personal Income Tax (as demanded by the Left), while the Rs one lakh ‘savings allowance’ across various tax segments provides investment flexibility and could drive more funds to the capital market via mutual funds.
That the threatened ‘Tsunami Tax’ did not materialise and service tax was not hiked (although its reach has been expanded) were other pluses. The reduction in corporate tax and relief to specific sectors such as textiles, sugar etc. have been welcomed but there may be some realignment in prices when the precise impact of the new Value Added Tax regime and reduced depreciation become clearer.
From the capital market perspective, the hike in Securities Transaction Tax (STT) is entirely along expected lines, although a section of brokers are hoping to wangle some concessions by claiming that the 25 per cent hike in tax for day traders is on the higher side. A significant relief for day traders is that their derivatives income will not be treated as speculative; this means that they will be entitled to relief available to regular income.
The FM has done well in ignoring the demand by a few companies to allow ‘sponsored GDRs’ to be the exchange mechanism in order to avoid capital gains tax and merely pay STT on shares tendered for the lucrative global offering. There is relief for foreign institutional investors (FIIs) also. They were forced pay cash margins, to be brought in well ahead of trades. They have now been allowed to provide non-cash security such as bank guarantee or government securities; this will encourage bigger investment from FIIs.
The savings exemption of Rs 1 lakh could find its way to mutual funds — already enjoying a serious resurrection of investor interest, having raised over Rs 4,000 crore in the last couple of weeks. The introduction of gold unit exchange traded mutual Funds is an important new addition to the menu of investment options. While gold trading happens on the commodities bourses, the gold units funds will attract ordinary investors, better acquainted with the capital market.
A curious decision is the redefinition of ‘securities’ by amending the Securities Contracts (Regulation) Act to provide a legal framework for trading of securitised debt, including mortgage-backed debt on the Over The Counter (OTC) or telephone market. It would have been far better to push these trades out of the OTC market and on to the two national stock exchanges, whose competence and growth came in for special mention.
RBI’s move to splinter the debt market, which is hanging fire since last September was also left unresolved. Instead, another high-level committee has been asked to examine market design and regulatory framework for trading in securitised debt and the bond market. The 1990s idea of developing Mumbai as an international finance hub, strategically located between London and Dubai has been revived and it has a better chance of implementation in a liberalised regime with comfortable forex reserves.
By lowering import barriers and rationalising domestic duty structures the FM has set the stage for industrial growth. He has also facilitated operational flexibility for RBI and paved the way for bank mergers. His focus on the social and rural sectors too is vital although actual delivery of these measures is always rather hazy.
