I am a fan of the science of Semiotics. And therefore convinced that human beings are constantly seeking and ignoring patterns around us. And equally sure that we are not rational creatures. This implies that what we think, what we feel and how we act can all be at a variance simultaneously. Go back and read this again and you will gather the all pervasive import of this.Unfortunately this truism is often ignored and not recognised enough by most. We ignore the value of sentiment. Amazingly it was the staid Manmohan Singh who wanted to unleash “animal spirits” in the economy at one point.

The Stock markets have been proverbially referred to as the the barometer of an Economy. Whereas there is only some truth in that since the economy and the markets can be at a tangent, it is undeniably a sentiment meter of the mood in a country. The Government is the biggest bull by default since its ownership in the markets even beyond the PSU’s is significant. Several Government sponsored undertakings and quasi federal bodies own stocks. This includes the likes of SUUTI and LIC among others. A buoyant market is the panacea for the burgeoning fiscal deficit of the country. Its also an important means to build and tap a saving culture of a young population.

So here’s a (wish) list of 5 things the Finance Minister can do to get the Mojo back in the economy and the stock markets:

1) Reduce Personal and Corporate tax rates significantly: 

An economist called Laffer introduced the world to the Laffer Curve which plotted the collection of taxes against tax rates. He concluded after several years of study that the relationship between tax collections and tax rates results in a bell shaped curve. Tax collections rise as tax rates rise and plateau beyond a point. Tax collections actually start going down as tax rates are raised beyond a point. So here’s the key point. The total tax collection is important not the rate of tax. The FM needs to reduce personal and corporate tax rates across the board. There should be no income tax below an annual income of Rs 10 Lacs (That’s just USD 15,000 p.a.) Let the maximum tax rate in the country be capped at 15 %. It is well worth the experiment and I have a strong gut that the total tax revenues will not suffer and be buoyant. Moreover this would do more to eradicate black money from our economy in comparison with disruptive steps such as De-monetization.

2) Offer for sale PSU Stocks at attractive values to the Public at large:

The equity cult is improving in India. However less than 5% of our savings finds its way to the Stock markets. The Government can raise an additional 25 Bn dollars to subsidise the oil shock this year. The amount sounds daunting but India will have savings of over USD 690 Bn this year with the Household sector contributing USD 350 Bn out of that. An aggressive divestment plan can be achieved by offering stocks of PSU’s at highly attractive prices to the public at large. Let many gain from the largesse of some of these monoplies at an attractive price. It helps the Governement to raise capital, channelise savings and also create a “feel good” when you share the bounty with people at large. It may well catalyse the process of spreading the equity cult in India.

3) Strategic Sale of Assets:

Saudi Arabia which has a GDP of less than USD 700 Billion (less than 30% of India’s GDP) has proposed to raise USD 100 Bn with a 5% dilution of the state owned ARAMCO. Although the issue is currently in jeopardy it shows the vision and scale of its leadership. The Government has been dithering on true privatisation. The Government has no business to be in so many areas of Business. There is little sense for it to hold stakes in Hindustan Zinc or for that matter retain any stake at all in Air India. There are at least a dozen Companies that the Government could look to divest in totality and which could easily raise USD 25 Bn. or more for the country. However that would entail biting the bullet by not owning a modicum of the company. This has its own set of issues on how to appease the Ministers who control these PSU’s and act as Czars running their fiefdom.

4) Ensure long term Visibility-Make the Annual budget less disruptive:

By definition Capital is long term in nature and accordingly deserves to be accorded visibility and policies that are long term in nature.From a global perspective the worst kind of environment is when a change in the ruling party at the Centre promptly seeks to undo the policies of the previous Government in power. This creates instability, uncertainty and a disruptive environment for Foreign and Domestic Capital. By definition capital is long term in nature and accordingly deserves to be accorded visibility and policies that are long term in nature. The annual budget exercise needs to take cognizance of that. It’s a circus and a exercise in futility for most of its provision. One that needs to be buried and made truly what it is meant to be a Budget exercise and not one of frequent policy initiatives. The Government should not be regressive in its outlook. Its existence is largely for making the lives of those who elected it safer, have better living standards and to be as less intrusive in their lives as possible. For starters the Finance Minister must consider re-instating the tax free status of the LTCG/Dividends and also abolish the regressive dividend distribution tax policy.

5) Get Private Investment back: 

Our Demographic Dividend is our largest resource and strength in comparison to the world. However this is no different than a mining lease and its advantage will dwindle largely in the next fifteen years. The BJP has lost four years of this Lease and its record on creating employment is terrible. At best we are now seeing brown field projects and greenfield projects are yet to be announced. The Government needs to find the ways and means to get Private sector Investment cycle and confidence back. You cant do that by constantly brow beating and policing everyone. The two simplest ways to achieve this is to bring Long term interest rates below 7%. We need to develop deep bond markets and also reward Long term Investment with selective but aggressive tax incentives. This is the one definitive way of ensuring social justice, robust employment and also development of backward areas in the country.

India has a great future ahead. Unfortunately our political system trumps many of its advantages. We need a few leaders to look beyond the calculus of electioneering and Machiavillian politics. One can only dream, hope and pray.