By Pankaj K Agarwal

Increasing retail participation in capital markets and financialisation of savings has been a stated objective of the policy makers and an economic necessity for quite some time. In the past, a number of initiatives were taken to achieve this, viz. Rajiv Gandhi Equity Savings Scheme, allowing NPS and EPFO to invest in capital markets and incentivising mutual fund houses for tapping smaller towns. This thrust bore fruit.

By December, 2019, the number of demat accounts stood at about 4 crore, the non-institutional category’s share in turnover of cash segment at over 55% and the share of individual investors in AUM of MFs at 53% with 8.64 crore folios; which have more than doubled since 2014.

Mixed signals for investors
However, in this Budget, there appear to be, at best, mix signals for retail investors. Amidst an omnipresent mayhem in the economy, the stock markets emerged as beacons of hope last year. Was it unreasonable to expect the Budget to further boost investor sentiment by slashing taxes and putting more cash in the hands of the investor? It sure wasn’t.

The only investor related change in taxation in this budget is the abolition of Dividend Distribution Tax (DDT). However, assuming that most of the capital market investors fall in the 20% tax rate and above slabs, no DDT means they actually end up paying an equivalent or higher amount as DDT worked out to be 20.56% (15%+Surcharge+Cess).

Another dampener came from no let-up in LTCG, a long-pending demand; and widely anticipated this time around. In fact, a double-whammy was dealt by introducing Section 194K which says that TDS is required to be deducted on income derived from specified mutual funds at the rate of 10% if the income exceeds Rs 5,000.

Building retirement corpus
In the prevailing “defined-contribution” pension regime, equities are the best hope of anyone building a retirement corpus. LTCG on equity gains is definitely not helping the cause of providing for the risk of living longer. The continuation of LTCG along with the new optional tax regime offering lower rates may deter many from investing in schemes like ELSS and tax-saving funds. Another regressive tax left untouched was Securities Transaction Tax (STT). Market players feel that volumes will shoot up sans STT. Higher volumes in the markets will make them more efficient and thereby attract more investors which is crucial to kick-start the investment cycle. There is another argument— which has merit— that STT leads to double taxation in the presence of LTCG; as it is levied at the time of purchase or sale of securities.

To be fair, the announcement of taking LIC public might have a salubrious effect on primary markets. It will also give the retail investor a chance to partake of the mother of all Indian IPOs. In addition, the announcement of introducing a debt-ETF is aimed at deepening the bond markets and allowing the retail investor to participate in the G-sec markets at very low costs. However, the retail investor already has the option of investing in G-secs through gilt funds so this move might really not mean much. The high networth individuals (HNIs) and Institutional Investors with their bigger ticket-sizes will stand to gain due to low cost.

Overall, Budget 2020 seems to have fallen short of the expectations of retail investors. One only hopes that some ameliorating measures will be taken to help sustain the momentum of healthy retail participation in capital markets.