The Finance Ministry, I am sure must be in an extremely busy state preparing the final Budget documents. It would also be getting hit by a huge number of recommendations from various Lobby groups. I am sure that each industry would be clamoring for incentives for investments, lower taxes, higher import protection etc. On my part after some thinking I thought of the following recommendations.
1. The first and foremost concern today is to get the investment cycle going. I believe that looking at the order books of a large number of infrastructure companies even if the roadblocks on implementation are removed for already awarded projects it will give a significant boost to the economy in the short run. Some incentives for capital formation in the short run could also be helpful in making companies move. We have seen that the Cabinet Committee on Infrastructure has already met twice and taken some decisions. These decisions obviously need to be speed-ed up. However all of this lies outside the scope of the budget and is a question of governance and clearances. One move that can be taken in the budget is to treat the Viability Gap Funding of infrastructure projects as equity in the hands of the developer. This will improve the debt to equity ratio of the projects and make funding more viable. Urban infrastructure projects do not face the same environmental issues that other projects face. As such in the short run there should be a focus on these projects to revive the economy. There have been plans of Metro networks in 20 large cities in the country. Besides this there are several infrastructure improvement projects across all major cities which can be accelerated. VGF going into equity will improve the viability of a large number of such projects.
2. One of the major reasons why exports have not picked up despite a very competitive currency has been the high interest rates in the country. It is critical to reduce the cost of export credit, both pre and post shipment. Competing economies have an interest rate environment where interest rates are 7 to10% cheaper than that for Indian corporates. There is need to have a system where adequate and low cost credit is available for exporters. This will have a significant impact on exports. A number of people argue that in earlier times exports have done well even when interest rates were much higher. However the reality is that in those times the global economy was not so stressed where no one wants to keep any inventory. Moreover the interest rate differential was not so high where most competing economies today have policy rates between 1.5-3% and India is at 7.75%.
3. Short term capital gains tax should be abolished on profits from equity mutual funds as well as direct equity. This will have a dual impact. Firstly we will see increased participation from domestic investors who have been continuously pulling out money from equity. Secondly it will remove the incentive for Foreign Investors to invest money into India through tax havens. More and more direct and transparent money will come into the country. The total collection of the government from Short Term Capital Gain tax is minuscule, however the cost of administration is quite high. Foreign investors will not need to come through tax havens and the ease of access of the markets will improve significantly. The boost in value such a move will give to the stock prices of PSU's will be a huge multiple of what the government can hope to make through the STCG tax. For example if the price of just Coal India moves up by 10% it will boost the value of the governments stake by nearly Rs 20,000 Crores. This type of STCG tax will come to the government in more than 3 to 5 years.
4. The biggest reason for a continuous liquidity deficit in the domestic markets, other than off course the tight monetary policy of the RBI has been the rising Current Account Deficit which is taking domestic liquidty out. Although the government has raised duties on Gold it is improbable that demand will fall drastically just because of this move. The focus should be instead on promoting investment both in Equity & Long term debt. An upfront tax incentive of 10% for saving upto Rs 2,00,000 in Equity Mutual Funds with a 3 year lock in will be attractive for investors. However this should be separate from the tax breaks that come with investing into Tax Saving Mutual Funds under section 80C. A similar tax incentive can be provided for investment into Bank Fixed Deposits with atleast a 7 year maturity and with insurance policies with a long term maturity.
5. As we have seen from the European example, fiscal consolidation and tight monetary conditions combined are a sureshot combination for slow growth revival.Significant steps have been taken towards fiscal consolidation, it is now time that domestic interest rates come down. One of the major reasons given for the slow downward movement of domestic interest rates has been the crowding out due to high government borrowings. My suggestion on this front would be for the government to go in for a long term sovereign bond issue, preferably with a 20 or 30 year maturity. Given extremely low rates available globally and the reduced risk aversion, my estimate is that India can raise 30 year USD money at approximately 4.5%. This will have three direct benefits, crowding out will be eliminated, government borrowing costs will come down & the INR will appreciate. Appreciation of the INR will have a direct impact on inflation which will trend down and give space to the RBI to reduce domestic rates. As such a strong virtuous cycle will start which will lead to significant growth revival. As a Sovereign the country can affort not to be hedged for a $ 20 billion borrowing which will be hardly 0.2% of GDP at the time of maturity.
These suggestions are simple to implement and have the ability to boost economic sentiments significantly.
MARKETS
The stock markets have behaved quite strangely running up to the budget. There seems to be a feeling of "The budget really cannot address so many issues by itself", while this is true there have also been steps taken outside the budget. On the derivatives side the markets are also approaching the budget extremely oversold with the Put:Call ratio for the current month at almost the lowest level from where I have started monitoring it. Normally such oversold conditions, combined with a negative February leads to a significantly positive March. The actual content of the budget as well as global cues will also be relevant inputs. The upside from here is that macroeconomic data points should continue to improve. The downside is that of a slowdown in global funds flow into emerging markets due to under-performance. However the longer term funds flow picture is intact with low inflation, low growth and continued high monetary stimulus across the developed world.
Will write more post budgets. Keeping my fingers crossed.
Article written by Sandipsabharwal
1. The first and foremost concern today is to get the investment cycle going. I believe that looking at the order books of a large number of infrastructure companies even if the roadblocks on implementation are removed for already awarded projects it will give a significant boost to the economy in the short run. Some incentives for capital formation in the short run could also be helpful in making companies move. We have seen that the Cabinet Committee on Infrastructure has already met twice and taken some decisions. These decisions obviously need to be speed-ed up. However all of this lies outside the scope of the budget and is a question of governance and clearances. One move that can be taken in the budget is to treat the Viability Gap Funding of infrastructure projects as equity in the hands of the developer. This will improve the debt to equity ratio of the projects and make funding more viable. Urban infrastructure projects do not face the same environmental issues that other projects face. As such in the short run there should be a focus on these projects to revive the economy. There have been plans of Metro networks in 20 large cities in the country. Besides this there are several infrastructure improvement projects across all major cities which can be accelerated. VGF going into equity will improve the viability of a large number of such projects.
2. One of the major reasons why exports have not picked up despite a very competitive currency has been the high interest rates in the country. It is critical to reduce the cost of export credit, both pre and post shipment. Competing economies have an interest rate environment where interest rates are 7 to10% cheaper than that for Indian corporates. There is need to have a system where adequate and low cost credit is available for exporters. This will have a significant impact on exports. A number of people argue that in earlier times exports have done well even when interest rates were much higher. However the reality is that in those times the global economy was not so stressed where no one wants to keep any inventory. Moreover the interest rate differential was not so high where most competing economies today have policy rates between 1.5-3% and India is at 7.75%.
3. Short term capital gains tax should be abolished on profits from equity mutual funds as well as direct equity. This will have a dual impact. Firstly we will see increased participation from domestic investors who have been continuously pulling out money from equity. Secondly it will remove the incentive for Foreign Investors to invest money into India through tax havens. More and more direct and transparent money will come into the country. The total collection of the government from Short Term Capital Gain tax is minuscule, however the cost of administration is quite high. Foreign investors will not need to come through tax havens and the ease of access of the markets will improve significantly. The boost in value such a move will give to the stock prices of PSU's will be a huge multiple of what the government can hope to make through the STCG tax. For example if the price of just Coal India moves up by 10% it will boost the value of the governments stake by nearly Rs 20,000 Crores. This type of STCG tax will come to the government in more than 3 to 5 years.
4. The biggest reason for a continuous liquidity deficit in the domestic markets, other than off course the tight monetary policy of the RBI has been the rising Current Account Deficit which is taking domestic liquidty out. Although the government has raised duties on Gold it is improbable that demand will fall drastically just because of this move. The focus should be instead on promoting investment both in Equity & Long term debt. An upfront tax incentive of 10% for saving upto Rs 2,00,000 in Equity Mutual Funds with a 3 year lock in will be attractive for investors. However this should be separate from the tax breaks that come with investing into Tax Saving Mutual Funds under section 80C. A similar tax incentive can be provided for investment into Bank Fixed Deposits with atleast a 7 year maturity and with insurance policies with a long term maturity.
5. As we have seen from the European example, fiscal consolidation and tight monetary conditions combined are a sureshot combination for slow growth revival.Significant steps have been taken towards fiscal consolidation, it is now time that domestic interest rates come down. One of the major reasons given for the slow downward movement of domestic interest rates has been the crowding out due to high government borrowings. My suggestion on this front would be for the government to go in for a long term sovereign bond issue, preferably with a 20 or 30 year maturity. Given extremely low rates available globally and the reduced risk aversion, my estimate is that India can raise 30 year USD money at approximately 4.5%. This will have three direct benefits, crowding out will be eliminated, government borrowing costs will come down & the INR will appreciate. Appreciation of the INR will have a direct impact on inflation which will trend down and give space to the RBI to reduce domestic rates. As such a strong virtuous cycle will start which will lead to significant growth revival. As a Sovereign the country can affort not to be hedged for a $ 20 billion borrowing which will be hardly 0.2% of GDP at the time of maturity.
These suggestions are simple to implement and have the ability to boost economic sentiments significantly.
MARKETS
The stock markets have behaved quite strangely running up to the budget. There seems to be a feeling of "The budget really cannot address so many issues by itself", while this is true there have also been steps taken outside the budget. On the derivatives side the markets are also approaching the budget extremely oversold with the Put:Call ratio for the current month at almost the lowest level from where I have started monitoring it. Normally such oversold conditions, combined with a negative February leads to a significantly positive March. The actual content of the budget as well as global cues will also be relevant inputs. The upside from here is that macroeconomic data points should continue to improve. The downside is that of a slowdown in global funds flow into emerging markets due to under-performance. However the longer term funds flow picture is intact with low inflation, low growth and continued high monetary stimulus across the developed world.
Will write more post budgets. Keeping my fingers crossed.
Article written by Sandipsabharwal
