NEW DELHI, INDIA – JULY 23: Union Finance Minister Nirmala Sitharaman during a Post Budget press conference at National Media Center on July 23, 2024 in New Delhi, India. (Photo by Ajay Aggarwal/Hindustan Times via Getty Images)
Hindustan Times | Hindustan Times | Getty Images
This report comes from this week’s CNBC “Inside India” newsletter, which brings you up-to-the-minute, insightful news and market commentary on the emerging powerhouse and the big businesses behind its meteoric rise. Like what you see? You can register here.
The big story
In 1696, King William III of England introduced a radical new tax on his subjects to raise government revenue: according to the decree, every household in the country would pay a levy based on the number of windows in their house. This usually meant that the bigger the house, the bigger the tax due on it.
Despite its progressive intentions, the tax failed to raise sufficient revenue for the monarch as people rolled up their windows to reduce their tax liability. In the long run, the policy was a net negative for the state, which had to deal with typhus, smallpox and cholera epidemics resulting from the lack of ventilation.
So what does window tax have to do with India today?
Property with bricked windows in the exclusive area of Mayfair on July 7, 2023 in London, United Kingdom. The window tax was a property tax based on the number of windows in a house. It was a major social, cultural and architectural force in England during the 18th and 19th centuries. To avoid the tax, some houses of the period appear to have bricked windows. The tax was introduced in 1696 and abolished in 1851. (photo by Mike Kemp/In Pictures via Getty Images)
Mike Kemp | In pictures | Getty Images
Earlier this week, India’s finance minister surprised markets with a measure she said would “deepen the tax base.”
Nirmala Sitharaman, who delivers her seventh budget, raised the tax on futures contracts and options to 0.02% and 0.1%, respectively — a 60% increase. In addition, the minister also increased capital gains for stock investors who redeem within a year from 15% to 20%. Long-term investors will also pay a revised rate of 12.5% on profits, up from 10%.
Borrowing a page from 17th-century England, India’s finance ministry hopes to implement a behavioral change with the levy and stamp out the “runaway boom” in the derivatives market, where retail investors account for 41% of total trading volume.
What may become a cause for concern for the government is if stock traders attempt to reduce their tax burden, rather than wean themselves off what has essentially become gambling and its unintended negative consequences.
For now, the tax hikes seem to have overshadowed many positive developments coming out of the Budget. Foreign investors have liquidated nearly $1 billion worth of Indian stocks in the two days since the Budget was announced and traders have sent stocks lower every day since then.
“The lack of populist spending is in line with our expectations, although the increase in capital gains tax on stocks is against our expectation of no change,” Upasana Chachra, chief India economist at Morgan Stanley, said in a note that given to customers soon after. the Budget was revealed.
Will the government achieve its goal through the levy, even if investors get over the initial pain?
“This increase in short-term capital gains tax from 15% to 20% will thus discourage excessive trading activities, while the increase in long-term capital gains taxes from 10% to 12.5% is sentimentally negative for the market in the short term. ” said Siddhartha Khemka, head of retail research at broker Motilal Oswal.
Not everyone is convinced.
“It may help dampen the more speculative nature of the market, but it is unlikely to deter retail investors in a significant way,” said Michael Langham, emerging markets economist at UK-based asset manager Abrdn. “This move can be seen as part of a broader effort by regulators to limit some of the financial stability risks posed to equity markets, and it is not far-fetched to imagine further measures to reduce some of the risks for retail investors.”
In fact, the risk to regulators could actually be inspired by modern Britain.
The United Kingdom introduced a stamp duty on every transaction in 1974. While the tax raises more than £3 billion ($3.9 billion) a year, it has given birth to far more dangerous forms of profiteering while also hurting the stock market.
Spread betting and contracts-for-difference (CFDs), which expose traders to much higher levels of potential losses – as well as profits – have grown since the 1990s. As neither product leads to stock ownership, the trading tax is completely avoided.
The tax is also playing a role in reducing valuation levels for the UK’s most profitable companies, according to the Institute of Fiscal Studies.
However, given the high valuations that the Indian stock markets are trading at today, the deleveraging tax may be a positive development in the long run.
I have to know
India is likely to ease restrictions on some Chinese investments. Restrictions are likely to ease investments in non-sensitive sectors such as solar panels and battery manufacturing, where India lacks expertise, according to Reuters news agency. The plans mark the first step in improving economic ties between the two neighbors, a relationship that has soured since clashes on the remote Himalayan border in 2020.
India “clearly has a problem,” says JPMorgan’s Jahangir Aziz. The chief emerging market economist believes India needs to find new drivers for its economic growth even as it expands rapidly. “It will be very difficult for India to sustain the growth rate of 6% to 7% in public infrastructure and services exports alone,” Aziz told CNBC.
Deadly virus outbreak. Health authorities in the southern Indian state of Kerala are on high alert following the latest outbreak of the deadly Nipah virus. It comes after a 14-year-old boy died from an infection over the weekend. First identified 25 years ago in Malaysia, Nipah is estimated to have a fatality rate of up to 75% and has been reported to have the potential to trigger another pandemic.
What happened to the markets?
Indian stocks are down for five consecutive days. The Nifty 50 The index is down 0.65% so far this week, although the benchmark is up 12.1% this year.
The yield on India’s benchmark 10-year government bond fell to 6.95 percent after the Indian government cut its forecast for this year’s deficit to 4.9 percent of GDP from 5.1 percent.
On CNBC television this week, Raghuram Rajan, former governor of the Reserve Bank of India, said the country needs to invest in education and skills to attract investment in sectors that add more value.
“If you look at the budget, again, what you would be concerned about is the huge amount of investment that’s going into infrastructure and the much more limited investment that’s going to be in building human capital,” he told CNBC.
Meanwhile, Suman Bery, vice-president of the Indian government’s public policy think tank Niti Aayog, said it would be “somewhat wrong” to assume that the budget unveiled this week was a consequence of the 2024 election results.
“India has added jobs, but they have been low-productivity jobs, and the only way for India to accelerate its growth rate is to shift its demographic dividend — its labor force — into higher-productivity jobs, and that will require various kinds of structural changes,” Berry said.
What’s happening next week?
US tariffs on several Chinese imports start next week. On the data front, several central banks are scheduled to issue some key decisions.
July 26: Core inflation in the US
July 30: Japan Unemployment Rate, Eurozone GDP, German Inflation
July 31: US interest rate, Eurozone inflation
August 1: UK interest rate
