Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation

Tax-and-spend budget has good long-term initiatives for the capital market

The Indian government budget for 2007-08 presented yesterday was a
tax-and-spend Budget, and neither the taxation nor the spending was
capital market-friendly, but the budget contained some policy
initiatives for the capital market that would enhance its vibrancy and
efficiency in the long term. I wrote a piece
on this in the Financial Express today. You can also read
this here

  1. I welcome the proposal to allow institutional short selling and create a
    proper securities lending and borrowing mechanism for this
    purpose.
  2. I think exchangeable bonds are a good idea, both as an additional
    financial instrument in the marketplace and as a mechanism for
    unwinding interlocked corporate holdings.
  3. The elimination of tax arbitrage on mutual funds is probably a
    good thing in the long run for the industry.
  4. The promise to move forward on making Mumbai a regional financial
    hub is welcome. This initiative announced in the 2005 Budget has gone
    through a tortuous process, with delays in committee formation and
    rumours of dissent within the committee itself. The FM’s announcement
    hopefully means that we will see some real action backed by a
    strategic vision.
  5. I read the Budget speech as signalling a willingness to improve
    access of Indian investors to foreign securities both directly and
    through mutual funds. Today it is much easier for Indians to use the
    $50,000 limit to invest in foreign currency bank deposits than to
    invest in foreign stocks and bonds.

All of this means that we will have a cleaner, stronger and deeper
capital market in the years to come. That is little consolation to
those nursing stock market losses on budget day, but it is hugely
important for the future of India.

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