Sameer Kochhar: How have Indian capital markets evolved in the last two decades?
Ashishkumar Chauhan: Indian markets have become one of the best in terms of technology infrastructure and transaction processing efficiency. Yet, less than 1 per cent of Indians invest in the stock market. It is important to understand that the stock market basically allows hedging against inflation because an investor’s money is invested in capital formation. It is productive capital that creates jobs for the country. To promote investment, the government offers tax incentives. For instance, if one holds shares for over a year, there is no capital gains tax, whereas all interest earned on fixed deposits are taxed.
Savings alone are not enough; investing those savings is equally important. The youth has to invest for the long-term and create wealth. Our working population is estimated to increase by 15 million year-on-year. The challenge is to create a superstructure that enables them to invest responsibly in inflation-proof investments. This is where financial literacy is going to play a key role.
SK: Gold is your biggest competitor and there is market failure in not being able to give low-risk, stable, inflation-proof returns. Isn’t growing the market geometrically a bigger challenge?
AC: Gold prices have gone up probably 5 times in the last 5 years. That coincides with Indian taxation that applies to the stock markets and not the commodities markets. India is basically one of the largest buyers of gold in the world particularly in recent times. In 2011 alone India imported around 65 billion dollars worth of gold in addition to silver and platinum. That has happened primarily because of securities transaction tax (STT). Bullion is not a productive capital. And government’s collection on STT this year has dropped significantly because of alternate channels of investment.
SK: If you look at it from an investor’s perspective, people have a pronounced need for risk-free investments, which gold offers. So, would a better argument not be that there should be no transaction tax at all, neither on equities or on commodities.
AC: You need to place all organised markets on a level playing field. What the government has done is to create disincentive for one market by pushing investments away from one market to another. If you keep the markets on an even keel and you have no taxes, that is good. There has to be an understanding at the policy level that investment in the stock market creates productive capital which in turn creates employment opportunities. Such investments also hedge against inflation.
Government has a legitimate need to collect taxes, but one has to keep the markets on an even keel. There has to be an understanding at the policy level that investments in the stock market create productive capital which in turn creates employment opportunities
SK: Would you say it will be a happier situation if there is no tax either on equities or on commodities because the economy is stagnating, the primary market is sluggish and the government has other ways like capital gains tax (to tax profit) rather than taxing transactions to earn revenue?
AC: What is important is a level playing field. Often government incentivises a particular activity because it feels that is good for the economy and for society. If you see the stock market over the last 5 years, in terms of volume it has gone down by nearly 50 per cent and commodities futures have gone up probably by 10 times. This is basically because of a small disincentive that has been created, probably unknowingly. Only in hindsight can one be wiser in saying that this has happened. Policy makers need to be aware of trends. It is common knowledge that a miniscule basis point tax on stock market transactions has created a huge balance of payment issue by pushing people into trading in gold, resulting in an unnatural demand pushing up gold prices.
SK: How do you think we can revive the primary market?
AC: In my opinion, removing disincentives is the only answer to reviving the primary market. Over 5 years the price of gold has increased manifold. Will it grow at the same rate over the next 5 years? I am not sure. Stock market investments will be in much greater demand moving forward, but only if we remove the tax disincentives altogether. This will aid fast recovery, help resolve balance of payments, capital formation and inflation related issues.
SK: What is your view on the Srikrishna Committee Report? It talks about merging all regulators and creating a super-regulator. Do you think this is healthy for India?
AC: The United Kingdom is a case in point where they merged many regulators, created a super regulator and they are now merging it with the Bank of England to create an even larger regulator. In the US, there are multiple regulators. We have evolved very rapidly in financial market regulatory framework and have created a very robust mechanism suited for our purpose. At the same time, there are many legislations that are outdated, some as old as from the 19th century. These need to be revised in tune with current realities for Indian markets to take a leadership position. The overall purpose should be to help India create long-term capital and get good returns for investors commensurate with economic growth in a transparent and cost-effective manner. In terms of the overarching situation, we have created many a legislation compared to when we started in the early 1950s. We have also created several regulators in the process to oversee different aspects of the economy. Given the experience of other countries, we need to reconcile the past with the current. Another issue is that most regulations we create are basically rear-view mirror driven. The situation is changing rapidly and coupled with technological advances and experiences of other geographies we need to ensure that we incorporate those learnings into the newer legislations and institutions that we create.
SK: What would be the top three action points from your perspective for making markets more inclusive?
AC: One is to give all organised markets a level playing field. Second is financial literacy and financial inclusion efforts. We have so far only scratched the surface. We have to get people interested in the primary market and financial literacy is where this starts. It can easily be incorporated in various school curricula and told as stories rather than making it heavy and uninteresting. Third is an emergent need to penetrate category B and C cities and towns. This will help increase the number of invesors. As a stock exchange, we have not been able to serve the investment needs of people in the hinterland.
SK: Do you see any triggers in the market or it is going to be life as usual?
AC: India is 16 per cent of the world population. Before the National Stock Exchange (NSE) came into existence, India already had 22 exchanges. Newer exchanges are always coming up and the way we look at it is that stock exchanges should measure themselves in terms of fairness, efficiency, transparency, orderliness and cost-effectiveness parameters rather than simply on creating volumes and widening the investor base. Exchanges need to work in society for the useful purpose of capital formation. If exchanges also take the onus on themselves to work on financial inclusion, increasing distribution and promoting safer products, for me those innovations will take India ahead; these innovations will create more capital and more jobs. Exchanges in India have in some sense a responsibility to work in that direction.