The Union Budget 2022-23 needs to build on the momentum of the past few years. More people need to benefit by participating in the equity markets. The government needs to consider every possible way to encourage the ordinary citizens of India to participate in investing directly or indirectly in equity markets.
Exchange-traded funds
Index investing created a revolution in the United States in the 70s. While there is wide publicity about benchmark indices like Sensex or Nifty, an average Joe in India must benefit from the quality financial performance of top Indian companies. As per NSE data, between March to December 2021, the total assets under management (AUM) of ETFs rose nearly 40 per cent in India to Rs 4,02,601 crore. The study also states that during the same period there has been over 18 per cent rise in total ETFs to 122.
Looking at the trend, more participation in the index or exchange-traded funds needs to be encouraged. The government can promote long-term savings in Nifty or Sensex ETFs by offering a lock-in and tax incentives on the lines of Equity-linked tax savings schemes. A greater allocation by the government-owned provident funds and pension funds into equity markets could also help.
Incentives to new-age fintechs
New-age fintechs are going to places where traditional banks, non-banking financial companies or securities firms cannot. The government needs to consider an incentive package for enrolling those otherwise ignored. That would give a further push to expanding the scope of financial inclusion. Companies have to invest a lot in creating and marketing meaningful content for investor education. They could do with some tax incentives or financial support to further expand investor education scope. Getting more people into the financial system channeling household savings into regular investments could do wonders for the economy. There is already a precedent of index investing benefiting average household wealth in America. India should look to follow that example.
Policies for home-grown startups
Recently, PM Modi while Interacting with over 150 startups as part of Azadi ka Amrit Mahotsav, declared that January 16 will be celebrated as ‘National Start-up Day’ as startups are the backbone of India. We have seen an increase in the number of tech startups which have gone public or are planning to go public in the future. Government in the last budget session had introduced a slew of incentives for the startups, this year too the government could consider more policies favouring these homegrown startups and make it even more conducive for them to run business in India.
Securities Transaction Tax
The government could consider relieving traders of the securities transaction tax. That would encourage new investors to try trading in the stock market. The government has made it clear to investors that India is not a tax haven and all income is taxable. The capital gains tax is already an established norm. The dividend tax also taxes profit distribution adequately. A securities transaction tax or STT discourages traders from trading. A robust financial market requires both investors and traders. Also, the revenue from the STT is not as significant as that from short-term or long-term capital gains tax and dividend tax. The government could consider doing away with it.
The Budget presents a unique opportunity to enhance the scope of financial inclusion. An expanded base of investors could lead to a robust retail market in India. We have already seen the impact of regular equity inflows into mutual funds on the stock market. The presence of more people in the financial system would make the retail market an attractive proposition for businesses to target for equity or debt capital raise. With the much talked about LIC IPO, there’s likely to be a huge spike in the demat accounts, as the largest insurance player in the country already has around 25 crore policyholders increasing the size of potential market by 2x.
The stock market is an engine of economic growth. After two tumultuous years, India’s economy is likely to be the fastest-growing major economy in the world again, according to most productions. Nudging more people to participate will only support future growth.
