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Four Decisions By The Government Which Have Hurt The Indian Economy

31 July 2019

The recent proposals and decisions taken by the Modi government to shape the country’s economy have all but devastated the financial markets whose slowdown is not showing any signs of revival. Be it the auto sector, or the extra taxation on the super-rich and the FPIs. The factors have not just impacted the market segments, but economy in general. The FMCG sector too has been facing the brunt of the slowdown as the sales have failed to pick up pace despite heavy discounts and consumer centric offers. So much so that the clothing brands are planning to extend the sale season to garner better response from buyers. The government with its every move is shaping the directions of the stock market only to steer it in the downward direction. The recent decisions which have contributed to the downfall of the economy are listed below:

Proposal To Increase Public Shareholding Of Companies To 35%

The Government has recently announced that the public shareholding of any public listing company  would be hiked from 25% to 35%. While this has come as good news for market traders, the big investors of the company’s promoters who would be holding the remaining 65% shareholding in the company are not happy with the move. However, their dissent to this decision is not being taken into consideration as Securities and Exchange Board of India (SEBI) the regulator body of all the stock markets in India has started the mammoth task of considering and planning to execute  the decision by the government.

Taxation On Super Rich

This move announced in Union Budget 2019 had an adverse impact on the markets as well, since a majority of investors fall under the Super Rich tax bracket and imposition of higher taxes on these individuals would directly imply a decline in the liquid cash available with them to trade. The tax rates on the super rich had been hiked to an effective tax rate of 39% on individuals with income between Rs. two crore and Rs. five crores annually and 43% on individuals with annual income above Rs. five crores. The same tax applicable on Foreign Portfolio Investors (FPIs) have led to a total outflow of funds to the tune of Rs. 3700 crores in the month of July alone. The fund flight has been a major cause of concern to the markets as the bearish movement is continuing relentlessly.  

Hike In Vehicle Registration Fees

The auto sector in India is staring at a downfall and an impending massive job cut due to the poorly executed rules suffocating the industry. It is not just the boost to Electronic Vehicles which is hurting  the industry, but also the hike in the registration fees of new two wheelers and cars  which run on petrol and diesel, mandatory transition from BS IV to BS VI norms and ultimately the overall negative sentiment towards auto sector. Among the steps taken for fee hike in registrations and fitness certificates, some major changes are:

Table: Comparing New and Proposed Registration Fees

The government is planning to take feedback from the stakeholders before implementing the new charges. However, the increment is sure to happen, furthering dragging down the auto sector. The positives are only for the Electric Vehicles segment and for scrapping agencies. The government has proposed that the vehicle owners will not have to pay fresh registration fees for new vehicles if they show a certificate of having scrapped their previously owned vehicle of the same category.

LIC To Launch Its IPO

LIC’s plan to launch the IPO will greatly affect the insurance sector where the 64-year-old corporation will form the largest chunk of the market and hence any minor change in its share price would most likely have a major impact on the markets. While the government will surely benefit from the move, the move will bring in a lot of volatility in this sector of the markets.

Conclusion

After the market corrections, the government needs correction of its plans and policies and would be soon forced to adopt a softer approach towards the various harsh decisions taken by them towards the economy. While some of these issues are final, some are yet to be implemented and hence can be modified to gain trust of the investors.

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