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The capital market is especially keen that the Finance Minister delivers the right Budget formulae which will spur growth. The main issue that needs to be addressed is the burgeoning fiscal and current account deficit.
A raft of measures designed to reign in unnecessary spending must be announced, with the goal of reducing fiscal deficit to 5.3 per cent with concrete plan for gradual reduction and keeping the current account deficit within safe limits. Unless spending discipline is effected quickly, there is a real fear that India's credit rating and investment allure will undergo marked decline, which in turn will see waning FII inflows. Public sector disinvestments including the monetisation of land banks must be considered in case it is necessary to raise resources to rein in fiscal deficit.
RGESS scope
Speaking from the stock market's point of view, the Government should consider to enhance the scope of the Rajiv Gandhi Equity Saving Scheme. Broadening the domestic investment base, by turning more Indian savers into active investors is of the highest priority. To achieve this, one way would be to raise ceiling on tax savings to 100 per cent of investment.
The Government should also consider raising the limit of investments covered under the RGESS scheme from Rs 50,000 to Rs 1 lakh.
This is also an opportune time to re-introduce investment allowance to accelerate private sector investments.
If short-term capital gains tax can be removed on stock investments there will be more flows into the market which will result in more collections through securities transaction tax.
One pitfall that the Government should be wary of, is indulging in costly populist, and ultimately counterproductive, announcements in the run-up to the general election.
One proposal is that about levying some kind of additional tax on the super-rich. While the logic behind such a measure is understandable, it could have the opposite effect of being negative for the economy as private sector risk taking will come down. So also any attempt to impose tax on dividend will only help further decline in investments, and hence, will be very untimely.
(The author is MD of Geojit BNP Paribas Financial Services Ltd.)
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