NEW DELHI, INDIA – JULY 23: Union Finance Minister Nirmala Sitharaman during the post-budget press conference at the National Media Center in New Delhi, India on July 23, 2024. (Photo by Ajay Aggarwal/Hindustan Times via Getty Images)
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This report comes from this week's CNBC “Inside India” newsletter, which brings you timely, insightful news and market commentary about the emerging powerhouse and the big players behind its meteoric rise. Like what you see? You can subscribe here.
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In 1696, King William III of England imposed a brand new tax on his subjects to increase state revenue: According to the decree, every household in the country would pay a tax based on the number of windows in their home. This usually means that the larger the house, the greater the tax payable.
Although its purpose was progressive, the tax failed to raise enough revenue for the monarch as people boarded up their windows to lower their tax obligations. In the long run, this policy was entirely negative for the state, which had to contend with outbreaks of typhus, smallpox, and cholera caused by inadequate ventilation.
So what does window tax have to do with India today?
Property with bricked windows in the exclusive area of Mayfair, London, UK, July 7, 2023. A window tax is a property tax based on the number of windows in a home. It was an important social, cultural and architectural force in 18th and 19th century Britain. To avoid taxes, the window spaces of some houses from that period were bricked up. The tax was introduced in 1696 and abolished in 1851.
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Earlier this week, India's finance minister surprised markets with a measure she said would “deepen the tax base.”
Nirmala Sitharaman delivering her baby The seventh budget raised taxes on futures and options trading to 0.02% and 0.1% respectively, an increase of 60%. In addition, the minister also increased capital gains from 15% to 20% for stock market investors who cash out within a year. Long-term investors will also pay a modified yield rate of 12.5%, up from 10%.
Drawing on the experience of Britain in the 17th century, the Indian Ministry of Finance hopes to use taxes to change behavior and eliminate the “uncontrolled explosion” of the derivatives market, where retail investors account for 41% of the total trading volume.
What may cause concern for the government is whether stock market traders are trying to reduce their tax burden rather than get away from what has effectively become gambling and its unintended negative consequences.
For now, the tax increase appears to be overshadowing many of the positive developments in the budget. Foreign investors have liquidated Indian stocks worth nearly $1 billion Traders have pushed share prices lower in each of the two days since the Budget was announced.
“The lack of populist spending was in line with our expectations, despite equity capital gains,” Morgan Stanley chief India economist Upasana Chachra said in a note to clients. The increase in taxes was contrary to our expectations that there would be no change.
Even if investors ignore the initial pain, can the government achieve its goals through taxation?
“The increase in short-term capital gains tax from 15% to 20% will curb excessive trading activities, while the increase in long-term capital gains tax from 10% to 12.5% is negative for market sentiment in the short term,” said Siddhartha Khemka, head of retail research at brokerage Motilal Oswal.
Not everyone is convinced.
“This may help defuse some of the speculative nature of the market, but is unlikely to deter retail investors to a large extent,” said Michael Langham, emerging markets economist at U.K.-based asset manager Abrdn. “The move could be seen as part of a broader effort by regulators to curb some financial stability risks in the stock market, and it's not far-fetched to imagine further steps being taken to reduce some of the risks to retail investors. “
In fact, the risks regulators face may actually be inspired by modern Britain.
The UK introduced stamp duty on every transaction in 1974.
Spread betting and Contracts for Difference (CFDs) have boomed since the 1990s, exposing traders to higher levels of potential losses and gains. Since neither product generates equity, transaction taxes are completely avoided.
The tax also depresses the valuation levels of Britain's highly profitable companies, according to the Treasury. Institute for Fiscal Studies.
However, given the current high valuations of the Indian stock market, the imposition of excess tax could be a positive development in the long run.
need to know
India may ease restrictions on some Chinese investments. Restrictions may be reduced Reuters reported that India lacks investment in non-sensitive industries such as solar panels and battery manufacturing. The plans mark the first step in improving economic ties between the two neighbors, which soured after clashes on the remote Himalayan border in 2020.
JPMorgan's Jahangir Aziz said India “clearly has a problem”. The chief emerging market economist believes that while India is expanding rapidly, it also needs to find new driving forces for economic growth. Aziz told CNBC: “It will be difficult for India to continue to maintain a growth rate of 6% to 7% just in terms of public infrastructure and service exports.”
Outbreak of deadly virus. Health authorities in the southern Indian state of Kerala are on high alert following the latest outbreak of the deadly Nipah virus. A 14-year-old boy died from the infection over the weekend. Nipah virus, first discovered in Malaysia 25 years ago, has an estimated case fatality rate of 75% and is considered to have the potential to trigger another epidemic.
What happened to the market?
Indian stocks fell for five consecutive days. this nifty 50 Although the index is up 12.1% this year, it is down 0.65% so far this week.
The benchmark 10-year Indian government bond yield has fallen to 6.95% after the Indian government lowered this year's deficit to 4.9% of GDP from 5.1%.
Former Reserve Bank of India governor Raghuram Rajan told CNBC television this week that India needs to invest in education and skills to attract investment in value-added industries.
“If you look at the budget again, what you're concerned about is that there's a huge amount of investment in infrastructure and a much more limited investment in building human capital,” he told CNBC.
Meanwhile, Suman Bery, deputy chairman of the Indian government's public policy think tank Niti Aayog, said it was “somewhat wrong” to believe that the budget announced this week was a result of the 2024 election results.
“India has been adding jobs, but these are low-productivity jobs. The only way for India to accelerate economic growth is to shift its demographic dividend – its labor force – into more productive jobs, and this will require various types of jobs. employment opportunities.
What happens next week?
U.S. tariffs on several Chinese imports are set to begin next week. On the data front, several central banks are scheduled to release some key decisions.
July 26: U.S. Core Inflation
July 30: Japan’s unemployment rate, Eurozone GDP, German inflation
July 31: US interest rates, euro zone inflation
August 1: UK interest rates