Get ready for a burst of economic reforms
While more reforms are on the cards, the risks to markets are from global factors. So look carefully before you leap.business Updated: Oct 31, 2014 23:19 IST
Indian stock markets rallied this week, despite the US Federal Reserve ending its asset purchase programme (also knows an quantitative easing), largely on indications of a renewed burst of economic reforms.
Among the reforms undertaken was the deregulation of diesel prices. The abolishment of subsidy on the fuel will help contain the fiscal deficit. The bill for LPG and kerosene, on which subsidy continues, would, over time, also be contained through targeted delivery of the subsidy.
The government has also brought some reforms in coal block auctions and labour laws along with the clearance of Rs 80,000 crore worth of defence projects.
However, a few other reforms would help speed up the process:
Tackling government debt
More than the bill for petroleum subsidies is the interest cost on government debt. To reduce this, the government would need to find out-of-the-box solutions. For example, the government can select a series of bonds and announce a scheme in which anyone buying the bonds would qualify for a deduction in tax, if the owner chooses to relinquish all rights (redemption and interest) on them.
The improvement in the fiscal situation would aid the government in its credit rating, which, in turn, would reduce the cost of borrowing.
Protecting domestic investors
India is one of the largest importers of gold, which, if legally allowed, leads to a huge current account deficit or to smuggling, if not allowed.
The reason for investing in gold is that people don’t feel secure about paper assets.
Consider the fraud perpetrated at NSEL for which the government has pinned responsibility on Financial Technologies India Ltd (FTIL), which owned NSEL and was in full control of it. The government has asked NSEL to be merged with FTIL.
Investors in NSEL earned a fixed interest and were not speculators. They invested, taking comfort from the fact that NSEL was an exchange regulated by the government. Investments were also based on the belief that there were stocks in the warehouse as collateral and the presence of a settlement guarantee fund for investors in case of default. The fraud proved them both wrong.
Tax on agricultural income for big farmers
The government should also bell another cat, that of tax-free status of agricultural income. The exemptions rather than helping small farmers, have provided an avenue for money-laundering. Growth of assets during electoral filings would testify to this. A simple and politically acceptable way out would be to tax large farmers. Against a tax-free limit of `5 lakh on non-agricultural income, why not tax farm incomes above `50 lakh? No small farmer would object, or cast his vote elsewhere. But one escape route for black money would be stymied.
Tackling black money at the root
Under order from the Supreme Court, the government has given names of 627 Indians on a leaked HSBC list of account holders in Swiss banks. These names cannot be made public for fear of flouting confidentiality norms under Foreign Account Tax Compliance Act (FATCA), which would impose costs on Indian borrowers. What is interesting is that, out of the $462 billion estimated by Global Financial Integrity to have been taken out of India between 1948 and 2008, only $2.3 billion are in Swiss bank accounts currently. Obviously, the much televised debate has given enough time for the money to escape.
Black money needs to be tackled at the root, by making it easier to do business in India, by reducing the number of permissions needed and by providing the infrastructure for businesses to function.
Investors need to look out for more economic reforms. These will happen, and will be cheered by the market. A revision in rating, if it happens, will lead to a sharp rally in stocks.
The risks to the stock markets are from global factors. Too much money has been created through QE and invested in assets at higher prices, creating bubbles. The bursting of these bubbles poses a big challenge, simply because central banks have exhausted their ammunition to counter another crisis.
So while domestic factors are positive, the global ones are worrisome. Being cautiously optimistic would be advocated.