01 March 2016

Budget 2016: Financial sector reforms – another day

I have a piece in today's Financial Express on the missed opportunities for capital formation and investment in the budget 2016-17. Attached below is the full piece:

The Budget 2016-17 charts out an ambitious goal as far as farm support and decentralisation up to the panchayat level. The results of that would only be visible only if the various schemes are implemented without excessive leakages.
What is disappointing is the treatment of investments and capital in the Budget. This Budget is unlikely to unleash the powerful and beneficial forces of capital raising and entrepreneurship. So, what are the five areas of concern from the perspective of capital formation?
First is the long-awaited reform in the taxation of alternative investment funds that invest in listed securities. Currently, they neither get the benefit of a passthrough nor do they get the benefit of long-term capital gains available to an investor who invests directly in listed securities. The illogical lack of such benefit means that a person investing in Infosys or other listed stock will pay 0% capital gains tax if held for a year, but if the same investor were to invest through the Sebi-registered AIF, he would pay upwards of 35% tax and harassment for paying even more. This could have been a major source of investment from domestic savers who underinvest.
Second, people were expecting a reform to foreign investment in stock exchanges, which has increased from 5% cap per investor to a 15% cap. From a control perspective, foreign investors would not be interested in such an increase, which raises their capital investment but restricts their ability to control the domestic exchange any further. A 5% control is quite similar to a 15% control in terms of ability to change management. So increasing investment will not look inviting.
Third, the concept of taking away the double taxation for dividend for high net worth investors and promoters means that there is now triple taxation. One, when the company pays corporate tax, two when the company pays dividend distribution tax and three when the investor pays tax. This may be sound rich bashing, but is poor policy for capital formation and investment.
Fourth, public banks are to be capitalised by only Rs 25,000 crore. The NPAs, the real quantum of which is a matter of conjecture, but by all estimates well in excess of that figure will restrict the ability of banks to lend purposefully. Particularly to the infrastructure sector and to the corporate sector in general.
Finally, the many recommendations of the Justice Srikrishna financial sector committee, with two exceptions, have not been announced for implementation. The two sought to be implemented on resolution of financial firms and monetary policy committee were both opposed by many.

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