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Budget 2013-14: Chidambaram rolls red carpet for FIIs, what about locals?
January, 23rd 2013

Finance minister P Chidambaram on Tuesday assured a gathering of global investors in Hong Kong that the government will not raise taxes in the upcoming Budget and that the fiscal deficit target would be met amid a stable tax regime.

Here is an extract from a note by investment bank Citi, which hosted the conference:

"…the FM was decidedly more positive. He suggests the fiscal deficit target will be met, taxes will not be raised the tax regime will be stable, and while policy will and should be biased towards the poor, the Budget will offer a lot."

It is not clear from the note if the Finance Minister has only foreign institutional investors in mind when he says that taxes will not be raised. By deferring GAAR and diluting some of its key provisions, the Finance Ministry has already signaled that it will do everything possible to keep foreign investors in good humour. At the same time, media reports over the last couple of weeks suggest that the government is considering ways to raise more taxes. The government may not have too many options other than increase taxes, considering that it has not shown much resolve to trim subsidies. And with general elections coming up in about 15 months, the government may not have much leeway on that front, given political implications.

FIIs have net pumped in net USD 2.67 billion into Indian equities in January so far, the highest ever in a single month. India badly needs foreign fund flows at this point, given its widening current account deficit, and to that extent, the government’s pampering of FIIs is understandable.

But it is also important that the government figure some way to channelize domestic liquidity into the capital markets. The rally since October has been driven largely by foreign money. And stock market traders will tell you that declining trading volumes clearly points to lack of domestic participation in the rally.

According to an article in Business Standard, average daily volumes in the cash, futures, and options markets so far in 2012-13 are down 7, 13 and 20 percent respectively, compared to the previous year. This is despite benchmark indices being at a two-year high.

As much as the Finance Minister is eager to woo foreign investors, he also needs to sit with domestic money managers and figure out a way by which domestic savings can be attracted to stocks and bonds. As economists and financial market experts have been repeatedly saying, short term measures, like hiking import duty on gold for one, do not address the core issue of why domestic liquidity is flowing into unproductive assets like gold and land.

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