Markets ride on new twin steps

Sending out a strong signal that the government means serious business and that there is now no looking back on the recent policy initiatives, the Centre has unleashed another set of economic reforms aimed at kick starting the economy buffeted by a mix of slowing GDP growth, decline in manufacturing activity, high inflation and policy inertia.    

In twin measures that will give a significant boost to investor sentiment and help fuel growth, Finance Minister P Chidambaram on Friday announced reduction in withholding tax on overseas borrowings to 5 per cent from 20 per cent and also approved the much-awaited Rajiv Gandhi Equity Savings Scheme (RGESS). The twin announcements saw the markets rallying to an 14-month high with the 30-share Sensex surging nearly 404 points to close at 18,752.83 points. Adding to the buoyant sentiment was news of Samajwadi Party continuing to extend outside support to the Manmohan Singh-led government.

Coming exactly a week after the Centre announced big-bang economic reforms, allowing multi-brand retailers to set up shops and permitting foreign carriers to acquire up to 49% stake in domestic carriers, the latest policy measures not only show the government’s strong resolve to carry forward the reforms agenda but more significantly that it will not cow down despite stiff opposition from some of its key allies on policy reforms.

While the equity saving scheme is aimed at first-time retail investors planning to invest in stock markets through tax concessions, the 15% cut in withholding tax seeks to lower the cost of foreign borrowings by Indian companies.

Chidambaram said RGESS will give tax benefits to new investors who invest up to `50,000 and whose annual income is below `10 lakh.

“It will act as alternative financial instrument and encourage more people to invest in this instrument rather than gold, which is a dead instrument,” he added. As part of the Union Budget 2012-13 proposals, former Finance Minister Pranab Mukherjee had announced RGESS with the aim of boosting flow of savings in financial instruments and improve the depth of domestic capital markets.

“This is also expected to widen the retail investor base in the Indian securities markets,” Chidambaram added. Besides investing in stocks of blue chip private and public sector companies, he said investors under the scheme would also be permitted to invest through mutual funds and listed Exchange Traded Funds (ETFs).

“This will encourage growth and enhance retail participation in mutual fund industry. This step will encourage the flow of savings in financial instruments and improve the depth of domestic capital markets,” said Sundeep Sikka, CEO, Reliance Capital Asset Management.

Regarding the withholding tax on overseas borrowings, Chidambaram said that appropriate amendments would be made in the Income Tax Act, 1961 under which the interest income of a non-resident investor will be taxed at reduced rate of 5 per cent instead of 20 per cent.

Meanwhile, the rise in the Sensex on Friday was the second biggest single-day gain after September 14 this month. Across broader market, over 1,800 stocks closed with gains driving up investor wealth by a whopping `1.27 lakh crore to `65 lakh crore. The NSE 50-share Nifty also gained 137 points or 2.46 per cent to 5,691.15 after touching day’s high of 5,700.