Brokers' reaction to transaction tax irrational, says Kiron Kasbekar

Nobody has called third-time finance minister P. Chidambaram's 8 July 2004 budget a "dream budget", as some people had described his proposals in 1997. Some TV anchors have wondered why their talk-show guests haven't called the latest budget a dream one.

There is a basic flaw in the way many commentators look at budget proposals. They want every budget to offer a load of concessions to every sector of the economy, and then show disappointment that, for example, "he has not done enough for industry".

Curiously, industry leaders said they were happy with the budget, some of them giving the budget a high approval rating. But, the all-knowing, ever-cynical TV anchors say argued the budget hadn't done enough for industry and this was reflected in the BSE stock market index nose-diving 112 points.

Further evidence was the tantrums of some Mumbai stockbrokers who went out on the streets the next day, like trade unionists, demonstrating against the budget. The day after the budget, the Mumbai market rallied by over 101 points.

The stockbrokers were out of sync with industry, even with investors. Their main grouse was the 0.15 per cent securities transaction tax on share transactions. The budget has brought some clear benefits to investors by offering concessions on capital gains tax, but the stockbrokers didn't care.

Was this because the stockbrokers, were expressing political opposition to a party? Or was it because they represent day-traders and speculators rather than long-term investors?

If the stockbrokers had really been concerned about the interests of investors and the markets, they would have spent more time to consider the details of the transaction tax. There is scope there for modifications, such as levying the tax on sellers rather than on buyers (which the budget proposals call for).

You may ask what is the difference? Every transaction has a seller and a buyer - so what difference does it make whether the government taxes the buyer or seller? A transaction tax on selling will be more effective because it will not discourage long-term buying while it will discourage day trading.

The transaction tax may well reduce volumes a bit for some time - but it will reduce the volatility, which is one of the biggest problems in the Indian stock markets, and especially for small investors, who nearly every time there is a boom, become the "next suckers round the corner" because speculators have taken the markets too high too fast before small investors can enter.

Unfortunately, Indian government budgets have become an occasion for political swashbuckling. Finance ministers unnecessarily go beyond genuine budgetary issues - as in the case of the latest announcement of higher limits for foreign direct investment in the insurance, telecommunications and aviation sectors.

Clearly, Mr Chidambaram has had little leeway to work in, considering that by the time the budget is passed, barely about half the year will be left. His BJP predecessor's budget provisions determine the first half of government revenues and expenditure.

The finance minister may have been a little too hasty in offering excise tax exemptions in certain areas, such as computers, dairy machinery and tractors. Actions such as these should best have been left for the next budget in early 2005, since there would have been more time for the finance ministry to work out the full implications of the tax measures. Reversing a tax cut is always more problematic than reversing a tax increase.

Given the limited space he has had (including relatively little time to prepare the budget) he has done a remarkable job. If you ignore the carping of the Left parties over the FDI limits, and the sore-loser remarks of BJP representatives, you will see that the finance minister has done a good job of not hitting any sector while offering the beginning of some important initiatives in areas like agriculture.

Some of these are seen as re-packaging of the previous government's policies and programmes. But hasn't every new government taken something of the previous government's policies and called it its own? It is foolish to expect finance ministers to produce "dream budgets" every year. Governments need to spend more time and energy on implementation. And that is one of the things Mr Chidambaram is trying to do. We can only hope he succeeds in bringing reform and efficiency to the entire public administration.