Budget 2025: Opportunity to further strengthen Indian capital market

Simplifying the tax structure could enhance India’s competitiveness as an investment destination, said Shripal Shah, MD & CEO, Kotak Securities

Shripal Shah, MD & CEO, Kotak Securities

The Indian capital market has emerged as a key driver of economic growth, reflecting the nation’s resilience amidst global headwinds. While the government and the Reserve Bank of India (RBI) have demonstrated exemplary leadership in navigating complex global and domestic challenges, the upcoming Union Budget presents an opportunity to further strengthen the Indian capital market. Among these, rationalizing transaction costs and tax structures stands out as a critical area to unlock the market’s full potential.

Today, investors and traders in the Indian market face multiple charges, including brokerage, exchange transaction fees, clearing fees, SEBI transaction fees, Goods and Services Tax (GST), stamp duty, Securities Transaction Tax (STT), and capital gains tax. These cumulative costs increase the cost of trading and investing, making trading and investment costly affair.

Despite the remarkable growth in demat accounts—now exceeding 18 crores—the number of active investors remains underwhelming. Less than 5 crore investors transacted in the last year, which, in a population of 1.4 billion, highlights the under-penetration of equity markets in India. By comparison, equity market participation in the US and China is far higher, underscoring the untapped potential in India’s markets.

Rationalizing Transaction Costs

The capital market ecosystem has become increasingly expensive for investors, which discourages long-term participation and pushes many towards unregulated avenues. Rationalizing transaction costs, particularly STT and capital gains tax, would make investments more affordable and attractive for both retail and global investors. While STT plays a key role in tracking compliance, a moderation of its rates could reduce the overall transaction burden without significantly impacting the government’s revenue.

Moreover, addressing the tax structure on capital gains is equally crucial. Currently, investors are taxed on their gains while also bearing STT. This double cost pinches both domestic and foreign investors, especially at a time when the rupee is under pressure and global economies like the US and China are actively courting investors. Simplifying this structure could enhance India’s competitiveness as an investment destination.

Boosting Equity Participation

For India to achieve sustained economic growth, increased equity participation is imperative. The capital market regulator’s recent measures to cool down derivative trading volumes have been a step in the right direction, but this alone is not sufficient. Boosting activity in the cash segment and encouraging long-term investments should now be a priority.

Rationalizing transaction costs and taxes would not only make equities more accessible but also help draw investors into the regulated market. This, in turn, would reduce the risk of investors straying into unregulated or speculative avenues, fostering a healthier investment ecosystem.

Expanding the Retail Investor Base

India’s demography presents a tremendous opportunity for market growth. With a population of 1.4 billion and a growing middle class, the potential for expanding retail participation is immense. However, for this to materialize, the market must be made more inclusive and investor friendly.

Efforts should go into educating potential investors about the benefits of equity investments and simplifying processes to encourage their entry into the market. Tax incentives for retail investors and measures to reduce the overall cost of transactions could act as powerful enablers to expand the investor base.

Expectations from capital markets

The Union Budget is an opportune moment for the government to demonstrate its commitment to fostering growth in the capital markets. By rationalizing STT, moderating capital gains tax, and reducing transaction costs, the government can enhance the affordability and attractiveness of investing in India.

Such measures would not only deepen equity participation but also help channelize domestic savings into productive avenues, supporting long-term economic growth. Coupled with efforts to boost market transparency and investor education, India’s capital markets can achieve their full potential as a cornerstone of the nation’s financial system.

As we look forward to Budget 2025, the capital market stakeholders are optimistic that the government will seize this opportunity to address these critical issues. With the right measures, India can ensure that its capital markets remain robust, competitive, and inclusive, driving economic prosperity for years to come.

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