Everyone knows the difference between the Olympics and the Paralympics. In the former, we learn how the limits to human achievement are being regularly extended; in the latter, we learn the importance of being inclusive with differently-abled people.
For obvious reasons, we don't mix the two games. It wouldn't be fair.
The Indian stock market is a peculiar combo of the Olympics and the Paralympics where gifted and powerful athletes compete with the handicapped in the same race: the muscular foreign institutional investor (FII) competes with the skinny Indian investor. Little wonder Indians barely invest in equity.
We are not pointing here to the unequal nature of the contest alone, but to the fact that if you want a genuinely robust market, the players need to be evenly matched.
The Indian government has, however, been signalling repeatedly that it will not level the field for Indians.
The most recent exhibit in this case is GAAR - the General Anti-Avoidance Rules (GAAR) - which have been deferred for two years for FIIs and anyone investing in India from the outside, directly or indirectly.
FIIs investing in India pay practically no tax now, and this will continue for two more years. Not only FIIs, but crooked Indians, who have money stashed abroad in tax havens, can use GAAR to evade Indian taxes. In short, the government in actually encouraging Indians to stash money abroad for two more years. But hapless aam Indian investors are subject to all the taxes of the land - especially capital gains.
The question is: why is the finance minister so indulgent towards foreign investors and non-residents, when Indian taxpayers and investors are being told they have to pay more taxes - higher taxes for the rich, strong anti-avoidance measures, possibly an estate duty on inheritance, maybe more capital gains and dividend taxes, and many other things?
The answer, of course, is clear. Having run the Indian economy into the ground, where the rupee is being pulverised by a soaring current account deficit and high dollar demand, the UPA finance minister has no option but to court foreign hot money flows - and this means telling them GAAR will not apply.
So, the short-term inequity in favour of FIIs is understandable.
What is less acceptable is the long-term inequities built into the system, and also the dangers in depending on only FIIs for market growth.
Just as it needs two legs to compete in the Olympics, it takes at least two for the Indian markets to rise to its true potential.
The only way to move the markets based on genuine demand is by giving it two legs - one FII and the other domestic.
Here's what P Chidambaram, who is currently playing to market sentiment, can do to grow the other leg.
First, he needs to convince the provident and pension funds that they should invest in equity. Indians will not invest in mutual funds due to the risks involved. But asking pension and provident funds to do so in a safe way - by earmarking, say, 10 percent of the incremental corpus (or more, after obtaining subscriber consent), will minimise risk and improve returns. Currently, while the New Pension Scheme (NPS) has equity options, the Employee Provident Fund Organisation does not - thanks to its composition. Many unions oppose investments in equity, but their objections can be got over with if the government can guarantee returns for the lowest-income subscribers.
Second, avoid using the LIC as a dustbin for public sector stocks. Today, only the LIC has the size and long-term orientation to hold on to stocks for long periods without flinching. Unfortunately, Chidambaram is using the insurer to offload public sector stocks. The LIC has effectively been neutralised as an offset to FII funds.
The market will behave in a manic-depressive way depending on which way FII funds are flowing. If they want in, we have a boom. If they want out, it's out. But if domestic long-term money is available for stocks, including that of the LIC, the volatility of the stock markets will be lower.
Third, taxation of capital gains can be both reduced and enhanced. If short-term and long-term capital gains are both levied tax at, say, 10 percent, the market would boom. Long-term gain can be treated slightly better by giving it cost indexation benefits. So instead of zero tax, investors would pay some tax, but it would be less than the 15 percent now paid on short-term gains. Short-term players, now levied just 10 percent on gains, would trade more, bringing higher liquidity and paying more taxes overall.
Fourth, the securities transaction tax has worked well in India. It should not be tinkered with in the budget.
Fifth, the dividend distribution tax has also worked very well. There is no need to fool around with rates as the government earns easy revenue that cannot be evaded by anyone.
Sixth, all investments in any equity or balanced fund should receive the same 80C benefits as investments in equity-linked savings schemes (ELSS) or the hare-brained Rajiv Gandhi Equity Savings Scheme. The distinction between first-time investors and old investors which the latter tries to create is farcical and impossible to police.
Mr Chidambaram needs to realise that India is not growing because Indians are not investing - both as companies and individuals. Luring foreign players is silly when you can't get Indians themselves to invest in India. It can only increase our vulnerability to hot money flows.
The Indian stock market will not grow in a healthy fashion if Indians do not invest in stocks. This should be Chidambaram's prime consideration in this budget.
Updated Date: Dec 20, 2014 15:15 PM