Economic Highlights

New Delhi, 23 March 2012

Big Ticket Reform RGES

PUNCH ECONOMY BADLY

By Shivaji Sarkar

Finance Minister Pranab Mukherjee has quietly ushered in a big ticket reform: Rajiv Gandhi Equity Scheme (RGES) which allows tax concession up to Rs 50,000 along-with liberalisation and simplification of the process of initial public offer (IPO). Undoubtedly, the stock market and corporates are immensely to gain as the scheme would generate more bad money, if not black, than can expedite growth.

Recall, some years back investments in mutual funds (MF) were similarly allowed a concession. The net result was loss to the investors. The companies in pseudo insurance business linked their policies to MF and now have gobbled up thousands of crores rupees of small investors. But the rules of regulators like Insurance Regulatory Development Authority (IRDA) favour the companies more as the profits of these companies are soaring at the cost of poor common man.

Besides, this has a relative effect on public sector banks. It is no wonder that actual savings rates are going downhill. Their deposits utilised for infrastructure and other developmental investments are dwindling. Pertinently, the Economic Survey noted this negative savings trend with concern. Presently, this trend is being led by companies like Aegon Religare whereby even if a worse UTI scam-like scenario is repeated directly nobody is answerable.

Further, those who deposit in the RGES for tax relief and “quick gains” at the stock market are likely to end up big losers. Thus, it is wise to pay the tax component than invest in schemes like RGES with doubtful returns.

Undeniably, this is not a new experience for small investors. They have faced this since the 1992 stock market boom led by Harshad Mehta, by Ketan Parekh in the late 90’s followed by the UTI scam. In between there had been other less noticed scandals in LIC and other financial organisations. There is no gainsaying that Indian investors have yet to recover over Rs 2 lakh crore they lost in these operations. As these schemes target those with an annual income of less than Rs 10 lakh wherein the poorer sections of society are at great risk of getting pauperised.

The new proposal for IPOs is yet another danger to the economy. Mukehrjee said, “I propose to make it mandatory for companies to issue IPOs of Rs 10 crore and above”. Indeed, this is a red rag as it again targets small investors. The dangers are immense. Remember, between 1992-1998 thousands of IPOs of shady companies robbed gullible investors and the country of several billions rupees. Today, many of these were fly-by-night operators have vanished without a trail. Not a single paisa has yet been recovered, worse hardly any of these IPO issuers punished.

Importantly, one wonders why the Government now wants to officially back such dubious market instruments. Perhaps, the Government is too obsessed with the capital market notwithstanding, SEBI even with its best efforts has been unable to chastise them. Given that insider trade remains a phenomenon that decides equity prices artificially and the net gain is always of the operator and a loss to the people.

Arguably, isn’t the Government supposed to protect the public? Instead, it has virtually throws the people to wolves. Certainly, both sad and surprising that Rajiv Gandhi’s name has been used for such a scheme. Also, if the Government is fighting against black money, has it ever assessed how such “legitimate” operations would turn white money into black?

Interestingly, in this entire process the banking sector and small investment instruments like the National Savings Organisation would be worse hit as its money funds the Government’s developmental programmes. Considering that any Government having a high fiscal deficit has these instruments to back its operational needs.

Moreover, the RGES would further rob the Government of easy money. As small savings are already hit, the Government might find borrowing expensive as it would have to borrow at higher interest rate. This would create a cycle of further deficit and increase the cost of governance because debt servicing cost would increase.

Shockingly, the total Government debts are already touching critical levels of 45.5 per cent, only five points less than the notified danger mark. Resulting, in alarm bells beginning to toll. Needless to say, this so called reform would not leave any opportunity to correct the wrongs being done.

Specially at a time when the banks are facing a severe liquidity crisis as their funds have got entangled in several power projects --- almost to the tune of Rs 450,000 crore. As a result the obsession with the capital market is not only unwarranted but it is against the economic fundamentals.

Notably, the Government has to realise that the share market has neither ever been nor would ever be the barometer of economic health. The recent Occupy Wall Market protesters in the US have demanded action against the stock markets. As per their calculations several trillions of American citizen’s money has been lost in the equity market. A World Bank assessment puts the figure at $ 13 trillion.

Undeniably, India needs to learn from the the mother of stock markets experience, the US. Considering that the 2008 crisis was ushered in by the US stock markets crash. So was the Great Depression of 1930s.

Plainly, the Government must withdraw the two equity schemes. This would not only ease the liquidity crisis but also to give a boost to actual economic activities. Towards that end, Finance Minister Mukherjee must reorient his budget as he gives his final touches and replies to the debate in the Lok Sabha. He has to contain the administrative expenditure and take steps to bring down inflation, which is shooting up once again.

He needs to lower his tax rates and by scrapping the equity schemes divert the flow of money to his own National Savings schemes. It is no prudery to fund the needs of the market, which can do so on its own, by diverting it from the Government’s own kitty.

In the ultimate, the people need to have higher purchasing power coupled with industrial and agricultural growth. Today, the Finance Minister has time to correct his course. He must do this if he is serious about his growth projections. Bluntly, the country should not be pawned to some market operators. Mukherjee needs to keep in mind that political governance is about overall growth and poverty alleviation. There is still time to revise the steps which should be done post haste. ---- INFA

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