With a little over two months left for the Budget, Prime Minister Narendra Modi promised more “sound and prudent economic policies” which are “not for short-term political point-scoring” but for “larger national interests” and underlined the need to levy higher taxes on the capital markets.
“Let me make one thing very clear: This government will continue to follow sound and prudent economic policies, to ensure that we have a bright future in the long-run. We’ll not take decisions for short-term political point-scoring.
We’ll not shy away from taking difficult decisions, if those decisions are in the interest of the country,” Modi said here.
Modi was addressing a gathering, which included the top functionaries of the Maharashtra government led by the governor and the chief minister, Union finance minister Arun Jaitley, Sebi chairman U K Sinha among others, while inaugurating the Sebi-run National Institute of Securities Markets.
Describing the November 8-9 announcement of cancelling as much as 86% or Rs 20.51 lakh crore worth of currency in circulation as a “difficult decision”, he said, “demonetization has (brought about) short-term pains, but it will bring in long-term gains.”
On the need to increase levies on the capital markets in the light of amendments to the many of the bilateral investment and taxation treaties, Modi said, “Those who profit from financial markets must make a fair contribution to nation-building through taxes…. We should consider methods for increasing it in a fair, efficient and transparent way.
“… now it is time to re-think and come up with a good design which is simple and transparent, but also fair and progressive,” Modi said, adding for various reasons, contribution of tax from those who make money on the markets has been low due to illegal activities and frauds or due to the structure of our tax laws which offers low or zero tax rate is given to certain types of financial income.
Claiming that he has brought back the economy to good health from the brink when it was saddled with high fiscal and current account deficits and high inflation and falling rupee, since he took over in May 2014, Modi said when the global economy is fighting lingering slowdown, “India is being seen as a bright spot. Our growth is projected to remain among the highest in the world.”
Stating that the country’s “place as the fastest growing large economy has not come about by accident,” Modi said to see how far the economy has travelled, we should look back to 2012-13 when “India was the weakest of the Brics nations.” The Prime Minister exuded confidence that the Goods and Services Tax would be shortly a reality after pending for years.
Though financial markets can play an important role in a modern economy by helping mobilise savings and channelling savings towards productive investments, Modi warned that history has also shown that financial markets can also do heavy damages, if not properly regulated.
Calling for more coordinated regulations in the financial markets, Modi said even though the Forward Markets Commission was abolished and merged with the Sebi to regulate commodities and commex derivatives, the spot market is not regulated now.
Similarly, “agri markets are regulated by the states and many commodities are purchased directly by the poor and the needy, not by investors. Hence the economic and social impact of commodity derivatives is more sensitive,” he said.
For financial markets to function successfully, participants need to be well informed, he said, and noted that the National Institute of Securities Markets is performing the role of educating lakhs of students.
The Prime Minister also called for ensuring that start-ups also approach the stock markets.
Lauding the success of Dalal street in the past 150 years, Modi said for him to “consider the financial markets to be fully successful, they have to meet the following three challenges.
“The primary aim of the market should be to help in raising capital for productive purposes. Derivatives have a use in managing risks but many feel derivatives are dominating the markets and the tail is wagging the dog,” he said.
Noting that most infra projects are financed by the government or through banks, he lamented that capital markets are rarely used for infra financing and opined that for infra projects to be viable, it is very important that the borrowing should be of long duration.
“So my call to you is to find ways to enable the capital markets to provide long-term capital for infra, bond markets must become a source of long term infra finance”.
Stating that he is “disappointed that even now we do not have a municipal bond market,” Modi urged Sebi and the finance ministry to ensure that at least 10 cities issue municipal bonds within one year.
Noting that ultimate success of market is in providing benefits to the millions of farmers, Modi said, “The true measure of success is the impact in villages, not the impact in Dalal Street or Lutyens’ Delhi.”
“By that yardstick, we have a long way to go. Our stock markets need to raise capital in innovative ways for projects in agriculture. Our commodity markets must become useful to our farmers, not just avenues for speculation. People say that derivatives can be used by farmers for reducing their risks.
But in practice, hardly any of our farmers uses derivatives.
“Unless we make the commodity markets directly useful to farmers, they are just a costly ornament in our economy, not a useful tool,” the Prime Minister said.
In this context, he asked the Sebi to work for closer linkage between spot markets like e-NAM (the electronic National Agricultural Market) and derivatives markets to benefit farmers.
Stating that the present Budget calendar delays expenditure authorisation to the monsoon onset, which is not a productive season, he said the Budget will be presented in such a manner that this does not happen going forward.
“Government programmes are not active in the productive pre-monsoon months. Hence, this year, we are advancing the date of the Budget so that expenditure is authorised by the time the new financial year begins. This will improve productivity and output.”