Why the markets shrugged off GAAR recommendations

Why the markets shrugged off GAAR recommendations

The stock market has just signalled that the extension of the general anti-avoidance rules (GAAR) deadline by three years is no big deal. The Sensex and the BSE-500 indices lost 0.26% and 0.25%, respectively, on Monday and the advance-decline ratio on BSE stood at roughly 50:50.

According to a dealer at a foreign brokerage firm, FIIs haven’t been restricted in any way since the announcement of the one-year extension, and so the additional three-year extension doesn’t really open any new avenues of investment. In other words, there’s no money waiting on the sidelines until clarity on GAAR emerges.

Needless to say, Indian markets have bigger things to worry about. According to a fund manager with a life insurance company, “GAAR is a non-event. India may soon have to face up to fund outflows if rating agencies downgrade it and it loses its investment grade status." On Monday, ratings agency Standard and Poor’s told television channel ET Now that India’s sovereign credit rating can be downgraded to junk status if the government fails to address the fiscal imbalances in the economy. And the outlook on this front is far from comforting at this point. According to a recent report by Morgan Stanley, the country’s FY13 fiscal deficit will be higher than budget estimates, citing that growth in non-tax revenue in the April-June quarter was below budget estimates and that expenditure growth during the quarter was higher than the rate of growth targeted for the year.

From a market structure standpoint, the expert panel’s recommendations on abolishing short-term capital gains tax and making up the loss by increasing securities transaction tax (STT) is clearly misguided. To start with, STT must be abolished as it impacts liquidity and price discovery. An increase in STT will lead to further distortions in the market and make the markets less liquid.

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PDF by Sandeep Bhatnagar/Mint