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Investing in the election IPO

Some of the promises made by political parties affect your pocket. Here's a look at the feasibility of these pledges.

Babar Zaidi | Print Edition: May 14, 2009

Suppose that a company promises you lots of good things in its IPO prospectus. You buy the shares thinking that you have a good deal on your hands, but a few months after the issue, it becomes clear that it is a dud company and there is no way it can fulfil its ambitious pledges. What would you do? Drag the company to court? Approach Sebi? Set up a forum for aggrieved investors? Vow never to let anyone fool you again? Or just resign yourself to fate and bear the loss?

Most of us would choose from the first four options when it comes to equity investments. After all, it's our hard-earned money and nobody has the right to cheat us. So, why do we settle for the fifth option when it comes to something more precious—our votes? Why are we taken in by the flamboyant promises dished out by political parties in their manifestoes and campaigns?

Which coalition will be the best for investors?
44.4%: Congress-led UPA coalition
38.9%: BJP-led NDA coalition
16.7%: Don't know/Can't say
Results of a survey of Money Today readers. The Third Front, which includes Left parties, did not get any vote.

Unfortunately, just like a company is not under a legal obligation to fulfil its IPO promises, a political party cannot be forced to adhere to its campaign pledges. The only difference is that while investors can choose to dump the shares if they don't like the way a company is functioning, a government usually comes with a five-year lock-in period. This is also why it is important to read between the lines when it comes to election manifestoes. Most of the poll promises are too far-fetched and there is little hope of their being implemented.

Just look at the generous tax structure proposed by the AIADMK. The party wants the income-tax exemption limit to be raised to Rs 5 lakh a year. This would put a lot of money in the pockets of all taxpayers. However, good politics is usually bad economics. The exchequer would suffer a loss of almost Rs 70,000 crore annually, or nearly 25% of the total direct tax collected in 2008-9. How the party plans to fill such a big gap in the exchequer finds no mention in the manifesto. Hopefully, a small regional party like the AIADMK may not be in a position to draft the Union budget. Still, it hasn't stopped the party from promising lower taxes.

If you want lower taxes, the BJP comes closest to fulfilling your expectations. The party's manifesto is every taxpayer's dream come true. It has proposed higher tax exemption and no tax on income from bank deposits if you don't have business income. Then there is the exemption on pension income for senior citizens.

Some of these proposals are very generous for pensioners in their golden years. But a blanket exemption for all senior citizens seems iniquitous. Why should a rich retiree earning an annual pension of Rs 6 lakh and another Rs 3 lakh from bank deposits not be taxed, while a middle-aged employee making Rs 4 lakh a year should? Also, while incentives for bank deposits can help boost savings, they will give such deposits an unfair advantage over corporate fixed deposits.

Similarly, the BJP's proposal to exempt the salary income and perks of defence and paramilitary personnel is a befitting sop for those who risk their lives to protect the country. However, with 16 lakh personnel, the Indian defence forces are the second largest in the world after China. Shouldn't there be a differentiation between active combat personnel and non-combat staff while doling out such benefits?

Compared with the long list of promises from the saffron party, the Congress has nothing exceptional to offer to investors and taxpayers. There won't be any tectonic change in the current tax structure. The only significant proposal is the introduction of the goods and services tax, which would replace all other indirect taxes from April next year. A major disappointment is that the party which opened the Indian economy to competition in the early Nineties has once again developed cold feet on the disinvestment front. The Congress manifesto says the government will retain the majority share in PSUs and nationalised banks. Perhaps PSU disinvestment awaits another decisive push from the BJP-led NDA.

For investors, danger could be posed by the Left-dominated Third Front. Dalal Street will not like the CPI(M)'s proposal to revoke tax exemption for long-term capital gains from equities and equityorinted mutual funds. Experts say that though a 10% tax on long-term capital gains is not too high, its reintroduction will have a significant impact on the investor sentiment. Perhaps, the Janata Dal(S) suggestion to tax capital gains if stocks are sold within three years of purchase is a better idea. It will do away with the preferential treatment to stocks and also prod investors to hold equities for longer periods.

It's interesting to note that no party or grouping has mentioned service tax in its manifesto. Service tax, which currently inflates expenses on services by 10.3%, is a pinprick for consumers. Last year, the exchequer earned Rs 65,000 crore through this tax. Instead, the Left has chosen to target the fringe benefit tax (FBT) and has promised to remove it. FBT is levied on companies, not individuals, though some companies pass a part of it to their employees.

Similarly, no party has any plan to bring rich farmers into the tax net by taxing agricultural income. The BJP, in fact, has proposed a regressive measure. It plans to do away with the practice of using agricultural income to determine the tax liability of income from other sources. Has anyone heard of a poor or small farmer with income from other sources? No, but there are lots of rich farmers who may have to pay lesser tax on such income. No marks for guessing which party they will root for in the current elections.

What do investors think about these poll promises? Money Today reached out to readers across the country to know their views. Despite its populist promises, the BJP is still not seen as a market favourite. Nearly 45% of the respondents consider the UPA as the investors' best bet. Importantly, the Third Front got no votes. On many other issues too, the respondents don't agree with the Left. Nearly 74% of the respondents feel that long-term capital gains from stocks should not be taxed, while almost 70% believe that the entry of private companies has improved the insurance sector by giving customers better service and greater choices. That's something the Left should keep in mind when it opposes the move to allow 100% ownership for foreign parents of private insurance companies.

- With Namrata Dadwal

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