Prime Minister Narendra Modi on Saturday flagged low taxes paid by those who profit from financial markets, some of which could be on account of illegal activities and fraud, and a perception that derivatives instruments for managing risks are, in fact, dominating the market direction.
Urging the Securities and Exchange Board of India (SEBI) to be ‘extremely vigilant’ to curb illegal activities aimed at avoiding taxes, Mr. Modi said, “Those who profit from financial markets must make a fair contribution to nation-building through taxes. For various reasons, the tax contribution from those who make money from the markets is low.”
Apart from fraud, Mr. Modi said that the structure of tax laws that allow low or zero tax rates for certain types of financial income may also be responsible for market participants’ low contribution to the exchequer and said there was a need to review this situation in a fair and transparent way.
He also urged the SEBI to work on linking the spot agriculture markets with the commodity futures that are now under its watch so that derivatives become useful for farmers as well.
“This is a big challenge in the commodity markets, where the spot market is not regulated by the SEBI, agriculture markets are regulated by States, and many commodities are purchased directly by the poor and the needy, not by investors. Hence, the economic and social impact of commodity derivatives is more sensitive,” Mr. Modi pointed out.
“Our commodity markets must become useful for our farmers, not just avenues for speculation. People say that derivatives can be used by farmers for reducing their risk. But in practice, very few farmers use it. Unless and until we make the commodity market useful for farmers, they are just a costly ornament of our economy, not a useful tool,” the Prime Minister said.
Pointing to a growing perception that derivatives are dominating the markets, the Mr. Modi said this was akin to the “tail wagging the dog” and asked the SEBI to ensure its focus remains on providing capital for projects that benefit the vast majority of population.
“The true measure of success is the impact in villages, not the impact in Lutyens’ Delhi,” Mr. Modi said, adding that the main purpose of markets must not be wealth creation alone.
Financing infra
“Today, most of our infrastructure projects are financed by the government or through banks. The use of capital markets for financing infra projects is rare. For infra projects to succeed, it is necessary to get borrowings of long-term nature,” Mr. Modi said, calling for a solution to the oft-cited problem of the lack of a liquid long-term bond market. He also asked the Department of Economic Affairs and the SEBI to target the issuance of municipal bonds by at least ten cities in a year’s time, to finance Smart City projects.
