What makes capital markets really appreciate a Union Budget? A generous plan for infrastructure development, a push for high economic growth, and ample spending on railways, power, defence, and other key sectors?
While these are the boxes investors want checked, history suggests this may not be enough, said hedge fund investor Samir Arora, citing the example of India’s larger neighbour, China.
In a post on X platform (formerly Twitter), Arora, founder of Helios Capital, essentially recommended not tightening the capital gains tax regime. He cautioned that even a reformist Budget may fail investors if it takes them for granted.
“Key is to do all reforms without explicitly and implicitly taking the end investors for granted,” Arora stated in his post.
As the Union Budget 2024 approaches, market participants have begun getting wary about a hike in capital gains tax -- either through a higher tax rate, or via extending the holding period to three years from one at present. Famed investor Vijay Kedia said in an interaction with CNBC TV18 that he thinks that the government could tinker with the capital gains tax in the upcoming budget.
Do economic reforms always mean happy markets? No. Look at China
Arora said that China implemented all the measures investors typically look for in a budget -- strong GDP growth, extensive infrastructure development, and improvements in living standards. Despite these positive developments, China's stock market did not perform well, ultimately serving as a deterrent to fresh investments and dampening investor sentiment and confidence.
China’s GDP has grown at an average of 9-10 percent per year since the nation opened up and reformed its economy in 1978, according to the World Bank, the International Monetary Fund, and other estimates. Between 2010 and 2020, China’s GDP nearly doubled, driven by massive investments in infrastructure, defence, and improvements in living standards.
However, the dragon’s stock market has often underperformed. The Shanghai Composite Index has been volatile, with significant crashes in 2015 and 2018, wiping out trillions of dollars in market value. China’s crackdown on the tech sector wiped out over $1 trillion from its big tech companies since November 2020. Foreign direct investment fell to a 30-year low in 2023 in the wake of mounting geopolitical pressures, data privacy rules and regulatory crackdowns.
Don’t ‘tinker with’ capital gains tax; it may hurt investor confidence
“Stock market is a strong signal which the world tracks to assess a country, its economy, its attractiveness and pulls in more investments -- FII, PE, and FDI,” Arora noted. He pointed out that while China's economic reforms were significant, the poor performance of its stock market acted as a bad advertisement, affecting the sentiment of investors and promoters.
China's prioritising of state control has reduced the autonomy of the market, wrote James A Dorn, Senior Fellow Emeritus, Cato Institute, in a recent post. The recent years have seen a return to restrictive practices, stifling economic freedom and investor confidence, Dorn added.
Arora’s key message to the Indian government is clear: Stability is crucial. He warns against making abrupt changes to capital gains taxes, terms, or rates, suggesting that such moves could unsettle the market. “It is easiest to not change anything that is working well,” he noted, advocating for a steady approach that maintains investor confidence.
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