Under pressure, FM forced to act

nirmala Sitharaman

If one were to draw a parallel between the BJP’s political and economic strategy, it would be something like this. Politically, the BJP has made some very smart moves. When it comes to feeling the pulse of the common man (which is their vote bank), they’ve got it bang on. By backing controversial politicians such as Yogi Adityanath and Pragya Thakur they played a dangerous game, which could well have back fired, but it didn’t. And you “have to” give them points for that. I mean, sitting in your C-suite in Mumbai or Delhi you probably look down on the ideology of such candidates, but in the heart of Uttar Pradesh and Madya Pradesh things are very different, and people have related to them, and hence they have been accepted. So, even if you and I don’t agree with them, kudos to the BJP on that front.

Economically, it’s a whole different ball game. Its economic policies have failed miserably; and it shows. GDP growth, investments, gross tax collections, industrial production, auto sales, exports – all are at multi year lows. Consumption, demand and business sentiment in the country could not be worse.

Keeping in tune with this theme, the recent budget presented by Finance Minister Nirmala Sitharaman last month in July was no exception. At a crucial time for the country, and with a strong madate, the FM was expected to come out with some tough policy action and offer stimulus to revive a sagging growth. However, that didn’t happen.

A slew of measures were ushered in which dampened stock market sentiment. Foreign capital in the form of Foreign Institutional Investors (FIIs) and Foreign Portfolio Investors (FPIs) took flight from the country, and the stock market saw one of the steepest falls in recent memory.

A few measures announced by the FM which were widely viewed as unfavourable by market participants were, increase in minimum public shareholding from 25% to 35% for listed companies, a proposal to tax buy back on shares at 20% and the most important and contentious of the lot, increase in surcharge on individuals and trusts earning in excess of ₹ 2 crore. With this amendment, the highest tax slab of 42.74% became applicable to those individuals and trusts earning in excess of ₹ 5 crore. FPI’s are mostly structured in the form of trusts. Therefore, this increased tax became applicable to them.

There was a massive hue and cry from many trade bodies and representatives of such FPIs. The government, however, stuck to their guns and insisted that they would not reconsider their stance going forward, and put the message out, if FPIs want to avoid paying higher tax, they should consider changing their status from that of trust to a company format.

It was then that FPIs and HNIs (High Net Worth Individuals) began pulling their money out of Indian stock markets and parking it elsewhere where tax laws were more accommodating.

After all the havoc wreaked by the stock market, and worsening general economic conditions, the government finally seems to waking up to this harsh reality. A government panel led by the Finance Minister has been meeting up with various industry leaders and trade bodies to hear out their concerns, and making an effort to address them.

The FM met bankers on Monday, representatives of MSMEs on Tuesday, automobile and component manufactures on Wednesday, Industry bodies on Thursday. She will meet representatives of the market, overseas investors and FPIs today, followed by home buyers and real estate developers on Sunday.

It is precisely on the back of this news that stock markets have surged in yesterday’s and today’s trade. In Thursday’s trade, the Sensex and Nifty spiked 1.74% and 1.63% respectively, registering its biggest gain in nearly three months.

The FM will be meeting market participants including senior officials of FPIs and mutual funds to ascertain their views on financial markets. The market is abuzz with chatter that that the government may exempt FPIs from increase in taxes all together. And further, there’s also news doing the rounds that long term capital gains of 10% on equity shares, which was introduced by the budget in 2018, would be done away with, if the holding period is beyond three years. However, these reports are still unconfirmed. But, if this is indeed the case, one can expect a sharp bounce back in the markets and a return of trust and confidence to some extent among investors (domestic and foreign alike).

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