Stock markets are a reflection of the state of a country's economy. It is also is one of the major sources for raising capital by companies. In the recent Union Budget, finance minister Nirmala Sitharaman had imposed hefty surcharge on Foreign Portfolio Investors (FPIs) registered as trusts triggering a huge sell off in equity markets. Foreign players have pulled out around Rs 10,000 crore since the Budget day. The government is making revenue from the capital markets through regressive measures like LTCG, taxation on dividends, buybacks and double taxation on equity mutual funds. The government hasn't been able to earn major revenue, but equity investors have lost Rs 12 lakh crore so far due to the myopic measures.
Two months ago, when Prime Minister Narendra Modi swept back to power with a landslide victory, equity investors and business houses were euphoric, but I have not seen any government lose such a tremendous goodwill so soon and so easily!
The extension of taxation to segments like share buyback, FPI trusts and the super-rich class proved to be detrimental to the investing environment and fund inflows into the equity markets. Benchmark index Nifty has declined by 8% followed by mid-cap and small cap index which declined in the range of 13-15% since the Union Budget announcement indicating disappointment among the investor community.
We are approximately a $3 trillion 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 participate 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 business of finance and investment. Apart from the players in financial markets, the government has a key role in the growth of equity culture. After meeting FIIs, big fund managers and HNI investors, the government gets an impression that huge profits are made in the financial markets. But the reality is different. The retail investors' portfolio is bleeding with many small and mid-cap companies on the decline post imposition of LTCG tax coupled with other regressive regulations.
In case of FPIs registered as trusts, the 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. Such a move could have stopped the ongoing rout in equity markets.
Now, the government needs to come out with stimulus package or immediate policy measures to boost demand and consumption, generate employment, increase per capita income and create investable surplus for individuals. The government has to tweak laws and provide special incentives, tax deductions and exemptions to investors so that long-term equity investments are encouraged. The government wants to achieve its target of Rs 1.05 lakh crore of divestment in PSUs. However, with the current carnage in stock 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.
It is high time Modi 2.0 comes out from its victory hangover. The government should spend its energy in competing with China, Korea and Taiwan. India has among the highest- land cost, 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 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 developing 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. Instead of focusing on frivolous legislations, the government should come out with pro-growth reforms to make India competitive vis-a-vis other countries to reap benefits from the ongoing the 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. The government will have to bite the bullet to revive economy and thereby financial markets. (The author is CEO - Stock Broking, Karvy)