NEW DELHI -- All of a sudden, the Indian stock market is hot.
Thanks to a Feb. 27 government budget proposal to reduce taxes on equity mutual funds, the market shot up 14% through March 17.
That's good news for the stock market, which has been experiencing a roller-coaster ride since a 1992 stock scandal was revealed.
Declining gross domestic product growth, down to 5% from 7.8% two years ago, also contributed to weaker stock-market performance, as did emerging-market turmoil that knocked one-quarter off the value of the Sensex index last autumn.
Now, however, government officials are relieving the market's malaise. The February proposal would eliminate taxes on dividends paid by the state-owned Unit Trust of India and all open-end mutual funds that are at least 50% invested in stocks. The government also proposed reducing long-term capital gains to 10% from 20%.
In response, the Mumbai Stock Exchange's Sensex index gained more than 400 points in the three trading sessions after the budget was presented, adding $10 billion in value.
More money will be routed to the capital markets through mutual funds that invest all or mostly in stocks, thus reviving the economy, said Jagdish Kampani, the founder chairman of JM Financial Ltd., Mumbai.
Ravi Sukumar, fund manager of the Kothari Pioneer Fund of Chennai-based Kothari Mutual Fund Ltd., said open-end funds will be able to pay out higher dividends. And mutual funds designed for use by pension plans will be able to raise more money that can be invested in the stock market.
Indian mutual funds are valued at $24.5 billion, of which the United Trust of India has a market share topping 80%. About two-thirds are fixed-income funds, while the rest are invested in equities.
The proposal will cause a shift to equity mutual funds from bank fixed-rate deposits, said Professor Jagdish Agarwal, Indian Institute of Finance, New Delhi.
Investor avoidance of stock funds has largely stemmed from underperformance by equity mutual funds.
But not everyone is convinced the budget proposal will change investor attitudes. Sher Singh, banking and consumer analyst for Mumbai-based Consult Opportunities, a banking consulting group, said: "While temporarily or in the short run these capital market sops for Unit Trust of India and mutual funds will no doubt lead to a surge in investments in these instruments, yet there will not be a marked change in the direction of investments by the retail investor."
