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How the health of Economy & Market will improve?

Jul 31, 2019(17:45)
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Just two months ago, when Prime Minister Modi swept back to power with a landslide victory, middle class in general but equity investors & business houses in particular were euphoric. They were awaiting a historic budget after a historic win which appeared to be quite visionary at a first glance. But the fine print turned out to be whipping the zeal of people cutting across economic class. There are already symptoms of overall economic slowdown. You just need to spend couple of hours on social media and you will come across endless tales of wealth destruction, job losses and failing businesses caused due to regressive steps and lack of firm policy measures by the Government. I have not seen any Government losing such a tremendous goodwill so soon, so easily!

The extension of taxation to the segments like Share Buyback, FPI trusts and the super-rich class has proved to be a dent in the investing environment and fund inflows into the equity markets. Despite the erosion of huge market capitalization, the government is more aggressive on tax collection rather than retrospection. If one goes by statistics, benchmark index Nifty has declined by 8% followed by midcap and small cap index which declined in the range of 13-15% since the budget announcement clearly indicating disappointment among the investor community.

We are approximately a $3 Tn economy with over 134 crore population, 150 crore Bank Accounts, Market Cap of Rs. 150 lakh crore but only 3.5 crore Demat Accounts. 8% of Indian population participates in equities and equity oriented avenues whereas it is around 35-45% in major developed economies. The ratio of market cap to GDP is one of the parameters which evaluates depth of the financial sector and it is above 100 in Singapore, US, Canada, Switzerland, Malaysia and Japan whereas in vibrant economies like UK, France, Germany and Norway, it is around 65-75. India’s reading is a bit under 100% which makes us stand in line with major global economies.

Thanks to the underperformance of other asset classes and Demonetization, more funds are entering the financial assets, especially equity class. Combined efforts by regulator, exchanges, industry associations, financial media along with market participants like fund houses and broking houses towards investor awareness and education have helped equity culture to grow. However, the domestic savings into equity markets is only 5% of household savings, which is pretty low compared to other emerging markets, where it is in the range of 10%-15%, leaving a lot of scope for growth of equity culture.

Equity markets are in the serious business of finance and investment; hence, the Finance Ministry should consider all major points before it prepares the Union Budget. Apart from the players in financial markets, Government has a very key role for the growth and maintenance of equity culture. After meeting the Industry players like FIIs, Big Fund Managers and HNI investors, Government gets an impression that heavy profits are being made in the financial markets. But the ground realty is completely different, where most of the retail investors' portfolio is bleeding with many small and mid cap companies which have declined significantly post imposition of LTCG tax coupled with various other regressive & stringent regulations.

Stock markets are a reflection of the state of the economy. It is also one of the major sources for raising capital by companies. The government is making revenue from capital markets through regressive measures like LTCG, taxation on Dividends, Buybacks and Double taxation on equity mutual funds. In the recent budget, government has imposed hefty surcharge on FPIs registered as trusts which has triggered a huge sell off in equity markets and foreign players have pulled out around Rs. 10,000 crore since Budget day. By imposing these sorts of myopic measures, though the government is not earning major revenue, equity investors’ hard earned wealth to the tune of Rs. 12 lakh crore has been destroyed so far.

In case of FPIs registered as trusts, Government should have given a year as moratorium or special window to transit from trusts to corporate structure, which would have soothed the nerve of foreign players and might have stopped the ongoing rout in equity markets.

Now Government needs to come out with stimulus package or few immediate policy measures to boost demand & consumption, thereby generating employment, increasing per capita income and creating investable surplus for individuals. Government has to tweak laws and provide special incentives, tax deductions and exemptions to investors so that long term equity investments are encouraged. Government wants to achieve its target of Rs 1.05 lakh crore of divestment in PSUs, however, with the current carnage in markets, it may be difficult to realize the target. Hence, more proactive steps are required to promote equity culture and boost investor sentiment to achieve its disinvestment target.

The hard earned money of the retail investors has started flowing into the equity markets like never before and equity culture is likely to grow in the coming future, and it is the responsibility of all stake holders to make sure that the confidence of the retail investors stays alive. A long silence from the North Block on the prevailing conditions of the economy is making the financial markets further nervous.

It is now high time for Modi 2.0 to come out from the election mode and instead of competing with regional parties / Congress, it should spend all its energy on competing with countries like China, Korea, Taiwan. As of now, India has among the highest-cost land, labour, capital, electricity, railway freight rates, air freight, corporate and income tax rates. To achieve 8 per cent GDP growth requires lowering each one of these rates. We urgently need new land laws to reduce land prices and acquisition costs; new labour laws that reduce labour litigation cost through flexibility: lower fiscal deficits that help reduce the interest rate; electricity reforms that reduces high industrial rates to subsidise farmers; rail reforms that end high freight rates that subsidise passenger traffic; lower taxes on aviation spirit to lower air freight; a lower corportae tax which is at par with major developin economies and a shift from high support prices for crops to direct cash benefits for farmers to lower agricultural prices and make them internationally competitive. Its a tough agenda but after a landslide victory, this is the time Government will have to bite the bullet to revive economy and thereby financial markets.

Instead of focusing on frivolous legislations, Government should come out with pro-growth reforms to make India competitive vis-a-vis other countries to reap major benefits from the ongoing US-China trade war. The time has come to display the political will to walk on the path of “Perform, Reform and Transform” to put India again on the growth trajectory which has been awaited since long time.

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Rajiv Singh

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