Budget 2022: Govt needs to encourage retail participation; offer incentives for investing in Nifty, Sensex ETF

By Kavitha Subramanian

The stock market witnessed multiple milestones, in the financial year 2021-2022, the Sensex spiked to 60,000 and the Nifty 50 reached 18,000 mark despite the second wave of Covid-19 and the currently-enforcing third wave. The stock market rally in the past year has undoubtedly contributed to the massive increase in the number of retail investors, as a result of impressive market rallies, equity investors’ wealth increased nearly Rs 78 lakh crore. 

Despite the great boom in the markets and 9 crore ‘happy’ investors, it’s an irony that overall equity penetration is still only 5-6% of India’s population. Considering that the average equity penetration in developed countries is over 50%, the Union Budget 2022-23 must create a momentum for greater equity participation by first-time investors.

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It’s clear that more people need to benefit by participating in the equity markets. The government needs to consider every possible way to encourage ordinary citizens to participate in investing directly or indirectly in equity markets. Here are a few suggestions for the Hon’ble FM to consider. 

• Exchange-traded funds: Index investing is ideal for small and first-time investors, who are looking to benefit from the quality financial performance of top Indian companies. As per NSE data, during March-December 2021, total assets under management (AUM) of ETFs rose nearly 40% in India to Rs 4,02,601 crore. The study also states that during the same period, the number of ETFs has risen to 122, an increase of over 18%. Looking at the trend, more participation in the index or exchange-traded funds needs to be encouraged. The government can promote long-term savings in Nifty or Sensex ETFs by offering a lock-in and tax incentives on the lines of equity-linked tax savings schemes. A higher allocation by government-owned provident/pension funds into equity markets can also help.  
• Incentives to new-age fintechs: New-age fintechs are going to places where traditional banks, non-banking financial companies or securities firms cannot. And, this particularly involves marginalised groups of people belonging to the EWS category. The government should expressly consider an incentive package to these fintechs that reach out to such individuals. That would give a further push to expanding the scope of financial inclusion and investor education. We believe getting more people into the financial system and channeling household savings into regular investments can do wonders for the economy. 

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• Policies for home-grown startups: Recently, PM Modi, while interacting with over 150 startups as part of Azadi ka Amrit Mahotsav, declared that January 16 will be celebrated as ‘National Start-up Day’ as startups are the backbone of India. We have seen an increase in the number of tech startups, which have gone public or are planning to go public in the future. In view of this, the government should consider more policies favouring these homegrown startups and make it even more conducive for them to run business in India.
• Securities Transaction Tax: The government should consider relieving traders of the Securities Transaction Tax (STT). This, in our view, will encourage new investors to try trading in the stock market. The government has made it clear to investors that India is not a tax haven and all income is taxable. That’s why we already have the capital gains tax and dividend tax. But STT, in our view, discourages traders from trading. A robust financial market requires both investors and traders. Also, the revenue from STT is not as significant as that from short/long-term capital gains tax and dividend tax. The government should consider doing away with it. 

The above recommendations aside, we feel that the Budget 2022-23 presents a unique opportunity to enhance the scope of financial inclusion. An expanded base of investors can lead to a robust retail market in India. We have already seen the impact of regular equity inflows into mutual funds. If more investors come into the financial system, it will be easier for businesses to raise equity or debt capital. 

Also, with the LIC IPO round the corner, there’s likely to be a huge spike in demat accounts as many of the insurer’s 25 crore policyholders will want a slice of its fortune. This provides the Hon’ble FM with a great opportunity to create momentum for large-scale equity participation. Here’s hoping for a great February 1. 

(Kavitha Subramanian is the Co-Founder of Upstox. The views expressed are author’s own. Please consult your financial advisor before investing.)