Union Budget 2019 India: A decisive and potentially strong decision maker has become Finance Minister in the wake of the decisive mandate.
- By Ranjan Chakravarty
Union Budget 2019 India: A decisive and potentially strong decision maker has become Finance Minister in the wake of the decisive mandate. As the run up to her first budget ensues, the clamour for all sorts of deliverables from her is increasing in intensity by the day. What is most disconcerting about these wish lists are that some of them include just about anything and everything that is misaligned in the Indian economy. It would be really amiss if Mrs. Sitharaman actually accedes to these requests and goes far afield in her policy initiatives and actually tried to deliver on many of the counts that she is being asked to. Here, we try to pinpoint what, in our opinion, she must prioritize and deliver.
So what is priority number 1? We strongly feel that it is time that we have a Finance Ministry that aligns itself solidly with the RBI. In the past, too much bandwidth has been expended in unnecessary policy disconnects between the RBI and the Finance Ministry. We have argued elsewhere that the current RBI Governor has been absolutely right on multiple counts within his brief tenure to date. He has demonstrated that he is committedly growth focused, and so is the Finance Ministry. Aligning forces would be a splendid position to establish early on in Mrs. Sitharaman’s tenure and will undoubtedly yield big growth dividends for India.
Second, and this follows directly from the first, we urge that the Finance Ministry throw its weight behind developing the capital market further, an item which has long been overdue. Specifically we feel that the focus should quickly move towards bond market reform. Within this area, we feel that quick wins would be gained if the bond market really strengthens regulatory oversight and promoted retail bond investing as an extremely high priority.
Promotion of retail bond investing would entail the tightening of restrictions on players who induce illiquidity into the system and simultaneously promoting small ticket retail in the fixed income market. Not only would this provide a great avenue for the existing small saver to diversify risk and gain a new avenue for income and wealth generation, but would also weed out liquidity blockages that have traditionally developed in the financial system with policy and regulatory stasis contributing to a state of the market that has by now become almost unaffordable and is costing us precious percentage points in GDP growth.
It is worthwhile noting that the paradigm shift in the South Korean economy emanated directly from its active retail bond market, which has powered it to transform itself from a basket case in the early 1960s into a leading industrialized nation by the 1980s. Malaysia and Indonesia have recently followed suit. There is no reason why India should not. Given the fact that our held to maturity banking books have extremely substantial holdings, just pushing them to get sold down and liquefied would add at least 2 percentage points to the growth rate, if not more, and without the inflationary pressure.
If retail bond investing in India gets a strong push, equity, commodity and derivatives investing should not be left behind. Equity investors in particular have been supportive of the market in spite of the draconian Securities Transactions Tax they have been burdened with since 2004, causing an unnecessary reordering of investor priorities which have been painful and meaningless for a long time. If Madam Finance Minister would slash this tax to zero, the impact on the market would be tremendous. A tax unburdened regime would enable all market participants to breathe and act freely, and endogenously induce much needed vigour into the market’s next push, which all anticipate with great hope.
Drilling down on the tax issue further, though we strongly feel Long Term Capital Gains benefits should be given to investors, we feel a rationalization of taxation to make it beneficial for short term investors must be an equal priority. The Finance Ministry must take cognizance of the fact that it is the short term market participants who provide liquidity, the lubrication that keeps the capital market running. Penalizing market participants for gains from such critical short term activity not only provides disincentives to them but hurts the overall economy as well.
Such a focused agenda on capital market and market related tax reforms would be the soundest strategy, delivering seamless infrastructure growth financing and asset reconstruction, and sustained GDP growth by at least 2 to 3 percentage points year on year. Our wish list is that Madam Finance Minister embark on this focused journey as soon as possible, beginning with this Budget.
Ranjan Chakravarty is Product Strategy, MSE. The views expressed are the author’s own.