Already, key indices have run up 15% over the past week, as the market appears convinced that the government will be able to push ahead full steam on the reforms track this time round, unfettered by demanding coalition partners. No doubt, policy measures will set the course for the market in the medium to long term. But in the short run, market watchers point out that some niggling micro issues too have to be urgently addressed to make the capital market more vibrant and dynamic.

Foremost among them seems to be a clearer distinction between short-term capital gains, business income and speculative income. At present, short-term capital gains attract 15% tax while business income and speculative income are taxed at 30% each. Business expenses (salaries, etc) are deducted while computing tax on business income, whereas there are no deductible expenses while calculating tax on speculative income.

At present, these (three) categories of gains are open to interpretation, giving rise to confusion... there should be some rationalisation as the investor is already paying various taxes, making the impact cost (in India) among the highest in the world, says Motilal Oswal Securities chairman Motilal Oswal.

The different taxes that an investor has to pay on an equity transaction include security transaction tax (STT), stamp duty charges, stock exchange transaction charges and Sebi turnover fee.

Market watchers are looking forward to the lowering of dividend distribution tax (DDT) in the coming Budget. Currently, dividend income is tax free in the hands of the investor, but companies paying those dividends have to pay a 15% tax. Investors say a lower DDT would mean more dividend in the hands of the investor.

Brokers are also hoping that the government will allow STT as a deductible expense, if not lower the tax rate.
At present, delivery-based transactions attract an STT of Rs 125 per lakh of delivery-based transactions and
Rs 25 per lakh of non-delivery transactions. The move has hurt jobbers day traders who play for small spreads the most, by squeezing their margins further.

At the macro-level, disinvestment of PSU companies, pension reforms, raising the ceiling on provident fund investments in equities, and hiking foreign direct investment (FDI) limits in sectors like insurance, retail, aviation is what will lay the foundation for a secular uptrend in the market.

The development of a debt market has become even more crucial, following the crisis as funding from international markets has all but shut down for corporates. This has made India inc completely dependent on Indian market for debt. Although bank financing is available, given the very large requirements of the infrastructure segment, it is expected that banks will hit their exposure limit very soon.

According to HSBC CEO Stuart Davis, although spreads have increased in the international markets, top corporates are borrowing at lower rates than the pre-crisis period. This is because interest rates on sovereign paper have come down to historic lows. He adds that while the international market would slowly open up for Indian corporates as well, there is a need for reforms in pension and insurance sectors to add depth to the domestic corporate bond market.