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Debt Market Reforms
The debt market remains one of the least developed financial markets in the country. As a result, although the average household investor prefers to invest in fixed income securities, she/he has not been attracted to debt instruments. It is to the credit of the finance minister, therefore, that the major focus of this year's budget in regard to capital markets is the development of an active debt market. The budgetary proposals in this regard aim at the setting up of a major institution for ensuring efficient clearing and settlement of large-sized deals in debt instruments as also some fiscal/legislative reforms for widening the range of tradable debt instruments.
Most of the initial reactions to the budget have been favourable, except those of certain opposition parties and the organised trade unions. One expects the opposition parties to criticise the budget. Some of the ruling coalition partners have also criticised the budget on some counts. Whatever be the merits or demerits of these criticisms, one important thing that emerges from a close reading of the budget is that, it has tried to put the reform process back on track after it had got almost derailed during the last couple of years. The reforms proposed in the budget are in several areas. I intend to focus mainly on the reforms/corrections that the budget introduces in the area of debt markets.
One important correction to last year’s budget is the reduction in the tax rate on dividends distributed by companies and mutual funds. The dividend tax rate has been restored to the level fixed by Chidambaram in his so-called ‘dream budget’. This change is of major significance to the capital market. It may be recalled that Chidambaram’s budget had made a significant departure from the past and had abolished tax on dividend income in the hands of the recipients. In its place, Chidambaram had introduced a flat 10 per cent tax on the amount of dividend distributed by companies and mutual funds. This was a very bold step, despite the fact that it was criticised as being anti-egalitarian.
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