The Associated Chambers of Commerce and Industry of India has urged the government and RBI to subject investments of Foreign Institutional Investors into Indian capital markets to moderate capital control regime so that such investments are brought to productive & constructive usage.
In a statement, the ASSOCHAM spokesman said that in emerging market economies like India, capital inflows can result in currency appreciation and thereby weaken it’s exports and external engagements. Therefore, the time has come when India needs to increase Capital Gains Tax on securities traded into Indian capital markets on FIIs investments from a stipulated level of 20% to 30% in case such investments refuse to stay in destined country within a period of six months.
It will ensure a stable micro management of Indian capital markets in globalizing environment and take the intended purpose to logical conclusion. The RBI although has been sterilizing capital inflows to keep exchange rates at competitive levels even though in recent months, capital flow situation actually got reversed which according to ASSOCHAM is a temporary phenomena. Sterilizing capital flows by RBI augments the money supply and reduces the flexibility in calibrating monetary policy.
Foreign inflows in Indian equities are gradually becoming a cause of concern for policy makers including RBI as it is felt that without a moderate deterrent in such inflows, Indian capital markets would over-stretch besides inflate rupee appreciation and create asset bubble.
Mr DS Rawat secretary general of ASSOCHAM said that this will not only weaken domestic export competitiveness but further fuel inflation and it is in view of this that the ASSOCHAM has recommended increase of 10 per cent capital gains tax on FIIs investments to prevent it from flying away before a period of six months.
The chamber is aware that the government and RBI are of the view that FIIs inflows to an extent of USD 150 billion can tolerably be absorbed in Indian economy but it is also of the view that FIIs investments ought to be retained for at least 6 months so that country in which such investments are committed can take some advantages and reinvest such funds for face lift of its economy.
Stability in FIIs investments and in their retention will be beneficiary for both investors and companies concerned but also increase India’s exports competitiveness, help it moderate inflation. Export competitiveness and curbing inflation pose the serious threat for policy makers in current economic scenario as well as emerging global conditions in which supplies remain under severe constraints.
Mr DS Rawat added that the recommended measures will bring some sort of discipline in capital inflows without creating adverse impact. Further pointing out that there is a scope for further liberalization of FDI norms which would be more beneficial and a long-lasting step for capital inflows rather than increasing India’s dependence on hot money.
