Time for a Neo-Tobin Tax

The Prime Minister’s speech at the inauguration of the National Institute of Securities Markets (NISM) campus outside Mumbai on 23 December 2016 seemed to have spooked certain players in Dalal Street enough to trigger a 0.9% drop in the Sensex, thus dragging it to a seven-month low. Although the Finance Minister Arun Jaitley has since gone on record to dispel further selling off and attributed the reaction to a minor misinterpretation, the Prime Minister’s speech itself comprised other elements, which are worthy of attention.

Far from advocating textbook neo-liberalism, the rarity of the domestic bond and capital markets in the funding of infrastructure was spoken about, the importance of regulating unfettered markets was highlighted, as well as the need for merging technological development with agriculture was mentioned. More specifically, the underdevelopment of the domestic capital markets warrants further attention. The Prime Minister himself said that most of the infrastructure funding in India stemmed from the government or from banks. In order for capital markets to contribute significantly, funds would need to be locked in for a long period, something that foreign institutional investors (FIIs) would normally be averse to. Such a requirement mimics a regulation that the previous Reserve Bank of India (RBI) Governor, Raghuram Rajan had imposed on 5 February 2015, where he stated that foreign portfolio investors investing in debt instruments would have to lock them in for a minimum of three years.