Most of the financial sector reform measures which figure in the Finance Minister's budget for 2012-2013 do not have immediate fiscal implications. However, since their primary objective is to seek more efficient market intermediation between savers and investors, they do have a place in the most important economic policy announcement, which the budget has become. The belief that such announcements contribute to a feel-good factor and blunt negative perceptions flowing from say, tax proposals, also explains why they figure prominently in all recent budget speeches. Important measures of this genre in the latest budget include (a) permitting qualified foreign investors access to bond markets; (b) simplifying the process of initial public offers (IPOs) to lower their costs and make them easily accessible to retail investors in small towns by utilising the nationwide electronic network of stock exchanges; (c) promoting shareholder democracy by harnessing technology. These reform measures are best appreciated as being part of a broad strategy of encouraging the flow of private, including foreign, capital. As much as Rs.50 lakh crore of additional investment will be required by infrastructure sectors during the Twelfth Plan period, half of this coming from the private sector. Further, the budget announcements complement ongoing legislative initiatives aimed at strengthening the financial sector.
A new equity-linked scheme meant to augment the flow of funds to the capital market has evoked mixed reactions. The Rajiv Gandhi Equity Savings Scheme seeks to encourage the flow of savings in financial instruments and improve the depth of the capital market. The scheme, which has a lock-in period of three years, would allow for income tax deduction of 50 per cent to new retail investors who invest up to Rs. 50,000 directly in equities and whose annual income is less than Rs.10 lakh. While more details on the scheme are awaited, it is clear that the primary motivation for a prospective investor would be the tax rebate it confers. For many in the salaried class — the target group for the new scheme — tax-driven investments such as in public provident funds, national savings schemes and so on are the only form of savings. It is highly questionable whether they should be lured to invest in inherently risky equity investments with attractive tax concessions. It is hoped that the definition of equity investment will be expanded to include mutual funds which, after all, have been the officially recommended investment vehicle for first time investors. Along with usual safeguards, investor education on a continuous basis will be absolutely necessary.
Keywords: Finance Ministry, Union budget 2012
This is a good move by the Government provided it is made mandatory that investments flow through Mutual Funds only. The lock-in should also be increased to 5 years or 7 years so that only long-term investments flow in. This will also be a good counter to the hot FII money which dominates the Indian Equity market now.
It is like rob Peter to pay Paul. Finance Minister is not really serious about the middle class investor. He just has made way to satisfy certain vested interest. The fine print is investment in equities is subject of Market risk like cigarette smoking is injurious to health.
There must be some incentives for saving and investing as they are the
two powerful engines for sustained development. The current budget has
tried to work out some strategies but there is deficiencies in the
policies. There should be free choices for investing in equities and
this sector of economy must be strengthened side be side there should
be reforms in the banking sector to facilitate greater saving and
their collaboration with the infrastructure sector be also give due
impetus.
There is always some scope for improvement and Finance Minister will
work out some of them in mean time.
Great! Now the Indian government is doing pretty much what the US government did in the 80s by pushing retirement savings schemes into the private stock-market-casino-scheme by use of accounts such as the 401k. All this means in the hard earned money of individuals is used by a institutional investors to gamble on the stock market. When the market crashes, our life's savings are wiped out. So, its either invest in a fixed deposit at 2% or get 20%/-20% in the stock market. Guess which one most people will choose?
Thank you for this interesting article.
I agree with the fact and opinion of the editor.
Will an retail investor investing Rs 50,000 have the necessary knowledge to be a primary investor in share market?
My comments are as follows: (1) Saving income tax through equity investments is one way to balance the family budget but that is available to only those individuals who are paying tax in excess of Rs 10,000/- per year. But such investments offer very little consolation to middle class families who face continuous rise in cost education, health care and housing on account of high inflation. (2) Past experience does not indicate any assured returns on equity investments made in the form shares or mutual funds. Hence, it is rather difficult to predict whether newly announced ‘Rajiv Gandhi Equity Savings Scheme’ would bring any substantial benefit to the investors. (3) The Employees PF Organization is always facing criticism as it is simply unable to revamp its administration and offer efficient service to PF subscribers. Budget should have provided more flexibility to tax payers by offering saving instruments which are as good as PF but are investor friendly.
There is no clear regulatory connection between a saver, a lender, a borrower, a money utilizer and a policy decider who decides as to where and how the money needs to be spend.This disconnect encorges the powerful to loot and the 99% continue to risk their savings.
I agree with the alert editorial that hard earned savings of the saver
and potential investor must have clear safety protocols in the speculators schemes in case the government as a usual borrower decides
not to share the direction utilization of investors and potential savers
money.
Government should not resort to enticing people to invest in instruments which do not have fixed returns in order to save tax. If the performance of these instruments turns out to be poor will the Government compensate the losses ? Even mutual fund instruments should not be included.Government should not encourage speculation.
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