Budget 2023: Financialisation Of Savings Will Aid Growth

WE ASPIRE TO BE a developed economy in the next 25 years. The momentum towards reaching this goal is already strong in some pockets. We have seen exponential growth in investor participation in capital markets in the last few years. The number of unique investors in the mutual fund industry crossed 3.3 crore in FY22, a 48% jump year-on-year. But despite the sharp rise, it is still less than 5% of the country's population.

To increase investor participation in MFs and take it to a high double-digit level over time, financial investments need to be more accessible, and appealing. As a higher percentage of savings flow into financial assets, it will lead to easy availability of capital for businesses, which, in turn, will lead to enhanced economic activity.

The accessibility part is being taken care of by service providers such as asset management companies. The second part of making such investment avenues more appealing needs a nudge from the government. The vision of making India the next economic superpower while ensuring an all-inclusive growth will require measures taken for the financial markets in the upcoming Budget.

Enhancing Retail Participation

This year, almost all global equity markets witnessed volatility, and India was no exception. However, domestic flows played a critical role in preventing the Indian market from a steep correction that could have been triggered out of selling pressure from foreign institutional investors (FIIs).

Going forward, the Indian fixed income market also needs similar strengthening. Introducing a debt-linked savings scheme on the lines of the equity-linked savings scheme will nudge more retail participation in the fixed income space. It will help in deepening the capital markets, enabling more businesses to tap the bond market for funding needs.

More Adoption Of Financial Savings Instruments

Ease of opening bank accounts led by the Jan Dhan scheme has ensured easy access to financial services. Over the past few years, the growth in digital payments, especially through UPI, has also enhanced financial inclusion. The next leg in this journey will be mass adoption of financial savings instruments.

For this to happen, incentives to move savings from low-return fixed assets to financial assets should be aligned. One of the low-hanging fruits in this area is raising the attractiveness of capital markets through tax breaks. The benefits under Section 80C of the Income Tax Act have remained unchanged for almost eight years now. A positive development in this area would be in the best interest of taxpayers, the markets, and the economy.

Tax Treatment Of Financial Products

At present, capital gains arising out of investments in different financial products are treated differently for taxation purposes. Different financial products investing in same asset classes are also treated differently, leading to tax arbitrage in favour of some. There is a need to fix these gaps and bring parity on the taxation front.

Pension-oriented Products From Mutual Funds

Mutual funds in India have earned the trust of millions of investors. In just over a decade since 2010, assets under management of MFs have gone up from around ₹6 lakh crore to almost ₹40 lakh crore. A logical next step would be MFs being allowed to launch pension-oriented products which get a tax treatment similar to existing pension products. This will promote the idea of long-term investing.

Financialisation of savings and easy flow of capital for businesses and infrastructure projects will play a vital role in Indian economy's journey towards an economic superpower. The Centre's plans for growth such as Make in India, transition to clean energy and infrastructure development will require massive funding. Channelising financial savings of the masses by making them a partner in this journey of growth will be the right approach. It is time to align the right incentives in an effective manner to ensure that the means and the end are rewarding to all stakeholders, and the country at large.