Don’t impose LTCG tax, step up investments

There are three major macro areas in which the Union Budget needs to focus. First of all, the government has to put in more efforts in the accelerating investments as a lower investment rate has been one of the major reasons for the slowdown in the GDP growth. Total investment (gross capital formation) is estimated to be 29% of GDP in fiscal 2018, which is the slowest since fiscal 2005 when it was 28.7% as the private investment is lagging behind. It is imperative that the government continues to accelerate public investment. Direct tax revenues before refunds are growing in poor single digit and non-tax revenues, especially from the telecom sector, have come down substantially. In this background, it is more prudent to give up target (3% of GDP in fiscal 2019) for the fiscal deficit and opt for actually higher fiscal deficit temporarily.

There many sectors which are still suffering from “single-digit growth syndrome” due to structural issues. IT and pharma exports are growing in poor single digit in value terms. Cement sales and steel consumption are also growing in poor single digit in volume terms. Launch of new homes have been impacted quite badly and inventories with many real estate firms have piled up even 200% to 400% of the annual sales. In this background, India needs more public expenditures and fiscal stimuli to spur the domestic aggregate demand.

The government also needs to rethink whether we need to continue to allow steep rise import of gold. India’s gold imports surged 67% in 2017 over 2016 to 855 tonne. Since 2012, India sent out more than $200 billion on import of gold which is around Rs 10 lakh crore in value terms cumulatively. Of course, a significant portion of this gold is re-exported. Worldwide, it is estimated that only 2% of new gold is mined and remaining 98% of total gold supply is through recycling. Just imagine if we could have saved even 50% of this import bill (which is Rs 5 lakh crore) by curtailing imports and recycling the domestic gold and circulated back this savings into the system what kind of demand it would have generated for other productive asset classes such as equity and real estate? Our forex reserves also would have crossed half-a-trillion dollars instead of crossing $400 billion now. India’s aggregate demand would get a major boost through macro multiplier effect, if we can save similar amount in the next six years.

The Indian equity market has seen a remarkable structural change in 2017 – households have pumped in Rs 1.30 lakh crore in mutual funds in 2017. This is over 260% of what foreign investors (Rs 49,500 crore) infused in the Indian equities in 2017. The domestic equity market is highly vulnerable to the behaviour of FIIs. Post-Lehman crisis, the net outflows from the Indian equities by the FIIs in fiscal 2009 was nearly Rs 48,000 crore, which led to the Sensex falling by over 52% from fiscal 2008 peak index. To minimise the instability in the Indian equity markets caused by the FIIs, it is imperative that the forthcoming Budget doesn’t remove “zero tax” on long-term capital gains for the Indian households. At best, the government could extend the time period for calculating long-term capital gains to three years from the current one-year norm. This would improve the culture of long-term investments and would also bring in more tax revenues to the government as a large proportion of investors do not wait for the three-year period in the markets.

The writer is founder and managing director, Equinomics Research & Advisory Pvt Ltd