The mystique that stock markets seem to hold for lay people and policymakers alike gets magnified several times over in budget season. There is, most certainly, no rational basis for this. Though devoid of real significance, the share markets’ verdict on the budget in the minutes and hours after the Finance Minister’s speech continues to be extremely important to policymakers. This has been amply demonstrated again by the urgency shown by P. Chidambaram and his team in allaying concerns over a provision in the Finance Bill that seems to cast doubts on the validity of residency certificates that benefit investors routing their investments through tax treaty centres such as Mauritius. On budget day, the sharp decline in share indices was attributed to just this single provision. The fact that the concerns are confined to foreign investors and tax havens used by them says it all. The broader market and the government are explicitly acknowledging the importance of these investors. It is, therefore, not surprising that in his budget speech, the Finance Minister gave his proposals relating to the broad category of foreign investors pride of place among financial sector announcements. None of them — and virtually none of the financial sector announcements — made reference to financial outlays but are nevertheless important for the policy direction they reveal.

In moving towards internationally accepted definitions of foreign institutional investment (FII) and foreign direct investment (FDI), the government is facilitating larger foreign inflows especially in sectors that have an FDI cap. Foreign investors may not have got their entire wish list. The much-anticipated announcement to expand the role of FIIs in the debt market did not materialise. But the package for them looks very impressive when contrasted with what is available for domestic investors, especially the retail ones. There has been once again a proposal to simplify the procedures for small and medium enterprises to access their dedicated exchange. More significant, in the context of infrastructure funding, is the proposal to start a dedicated debt segment in the stock exchanges. The facilities being accorded to foreign capital can be justified in the current macroeconomic context of the widening current account deficit. Yet the economy needs domestic investors too, not just the large ones but retail investors, who should ideally be the backbone of any well developed capital market. The ambitious disinvestment target next year, of Rs.40,000 crore, brooks no delay in enhancing the retail participation in the markets.

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