The Stock Markets Struggle Against Headwinds
Wednesday trading saw considerable swings between negative and positive after yet another bout of hammering on Wall Street overnight
On Episode 530 of The Core Report, financial journalist Govindraj Ethiraj talks to Ketan Dalal, founder of Katalyst Advisors and former Managing Partner (West) and Joint Tax Leader of PwC India.
(00:00) The Take: Cooked In Washington and Served in India
(05:29) The stock markets struggle against headwinds
(06:26) Inflows into Mutual Funds fall to 10-month low
(07:16) Retail inflation down to 7-month low of 3.6%
(10:18) What should India do on capital gains tax?
(24:26) Does the US Commerce Secretary understand Commerce, asks the WSJ?
NOTE: This transcript contains the host's monologue and includes interview transcripts by a machine. Human eyes have gone through the script but there might still be errors in some of the text, so please refer to the audio in case you need to clarify any part. If you want to get in touch regarding any feedback, you can drop us a message on [email protected].
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Good morning, it's Thursday, the 13th of March, and this is Govindraj Ethiraj Headquartered in Broadcasting and Streaming, usually from Mumbai, India's financial capital, but in transit right now. A quick reminder, once again, this is a holiday shortened week and we are off on Friday.
The Take: Cooked In Washington and Served in India
That's perhaps the best way to describe the astounding three-way deal between satellite telecom provider Starlink, owned by Elon Musk, and Indian telecom rivals Reliance's Jio and Bharti's Airtel. Now, news is that both Jio and Airtel will act as distribution, installation, and service partners for Starlink's internet broadband service. Effectively, they will also hand over their consumers or potential ones to Musk.
Given that both were competitors to Starlink, wanted to keep the company out, and are fighting each other in India as well, this is either a deal made in heaven or in the White House. Reliance formed a joint venture with Luxembourg-based SES in 22 and unveiled Jio SpaceFiber in 23 October. Jio also planned to deliver high-speed satellite internet at affordable prices.
Now, Airtel is already an investor in a UK company called OneWeb, which is also a satellite company and wants to roll out services in India. Reliance Jio formed a joint venture with Luxembourg-based SES in 22 and unveiled Jio SpaceFiber on 23 October. They too plan to deliver high-speed satellite internet at affordable prices.
The question, of course, is whether these two Indian telecom majors had any choice in this matter or this was effectively a fate accomplished. It smells suspiciously like the latter. It's like company B wants to launch a new car for which it has the technology capability but not the permissions, and now it's told to open sales and service centres for a rival from overseas who in most situations company B would have tried to keep out.
Or at least fought tooth and nail for market share. Now, satellite internet is a good-to-have complementary service. There is nothing to say it's a must-have or that calls for a deal of this nature to be pushed through, unless, of course, it's a must-have, as evidently is the case.
Remember, Reliance and Airtel have promised endless and seamless 5G mobile connectivity across India, which in most cases would be superior to most satellite broadband connectivity as we know it and at the price that we know of, except unless the location is so remote that a satellite would work best or, of course, if services fail. As a backup, there is no denying the importance of satellite-based communications, given that India's entire television content revolution of the last few decades was built on satellites and dishes still perched on our rooftops, till fibre internet and high-speed data on mobile phones came along. But wherever you live in India, you would admit that there are very few places in the country that actually lack data connectivity now, unless you're really trying to live an off-the-grid existence.
There is also the cost. At current estimates, it's believed that the hardware for satellite internet could cost upwards of Rs 20,000 and a monthly bill of about Rs 5,000 plus or more, unless the prices are specifically tuned for the Indian market. Neel Shah, co-founder of research firm Counterpoint and a frequent guest on the core report told Reuters that while it is surprising, it's a prudent strategy for Starlink to enter the Indian market and a win-win for all the parties involved earlier competing for the pie and now cooperating and sharing.
So just to remind you, these agreements come on the heels of Prime Minister Narendra Modi's meeting in Washington, where they discussed issues including space, mobility, technology and innovation that was meeting with Elon Musk. Starlink has been trying since 22 for licences to operate commercially in India, with no clear timeline yet on a decision. It's been delayed for several reasons, including national security ones.
Nothing linked to satellites in India is easy. Carrying a satellite phone for example at this point can get you even arrested and jailed unless you have specific permissions. Satellite internet is viewed through the same lens of national security.
So SpaceX too must get spectrum allocated, work on local data storage, apart from other security clearances. Between Airtel and Jio, obviously there's enough firepower to get things going, though in retrospect they had not succeeded either, along with other partnerships they had tied up. A report in Mint says at the India Mobile Congress last year, Sunil Mittal of Airtel backed the stance of rival Mukesh Ambani's Jio, that satellite companies must pay licence fees and buy airwaves for their telecom services, just like legacy telecom companies did.
He said that while he did not have anything against Starlink, all companies must be given a level playing field. They need to buy the spectrum as the telecom companies do, and need to pay the licence as the telecom companies do, and also secure the networks of the telecom companies, he had said. And Jio too had shared similar views, saying satellite firms should be treated at par with telecom companies.
Obviously that's a view that Starlink did not quite agree to and wanted spectrum-free. Of course, now it's all friends together. SpaceX's President and CEO said that they applauded Jio's commitment to advancing India's connectivity and they looked forward to working with Jio and receiving authorization from the government to provide more people, organisations, and businesses with access to Starlink's high-speed internet services.
Now, with satellite internet businesses tied up with a nice ribbon, it could be interesting to see how Musk's two other ventures, Tesla Cars and SpaceX Rocket, entered India, and what surprises we have in store. And that brings us to the top stories and themes for the day.
The stock markets struggle against fresh headwinds.
Inflows into mutual funds fall to a 10-month low.
Retail inflation fell to a 7-month low of 3.6%.
What should India do on capital gains tax?
And does the U.S. The Commerce Secretary understands commerce, asks the Wall Street Journal.
The Markets Fight Headwinds
Wednesday's trading saw considerable swings between negative and positive after yet another bout of hammering on Wall Street overnight. The tug of war was between IT stocks, which were down because of a perceived slowdown in the U.S. economy, or the recession that President Donald Trump has already acknowledged, versus banking stocks, which are up locally. The CENSEX closed the day with a marginal loss of 73 points to 74,030. The BSE benchmark was down for the fourth straight trading session. The NSE Nifty 50 was down 27 points at 22,470.
IndusInd Bank was a big gainer. Remember that loss earlier because of problems on the balance sheet and was now up as the company's founders tried to soothe investor fears. Infosys was down over 4%.
The BSE Bit Cap and Small Cap indices were also down with losses of about 0.5% each. The BSE IT index was down because of fears of a potential U.S. recession and downgrades by Morgan Stanley and Motilal Oswal financial services, according to Business Standard. Elsewhere, the dream that was thrust upon small and often unsuspecting investors and their slick, friction-free haps is now unravelling, even if slightly.
Inflows into India's equity mutual funds have now fallen to a 10-month low in February, according to data released on Wednesday, with investors moving to safety, with small caps and mid-caps now in bare grip, according to Reuters. Inflows fell about 26% month-on-month, the steepest percentage drop since April 23 to about 29,000 crores, according to data from the Association of Mutual Funds of India. Large-cap funds fell about 6%.
Small and mid-cap funds fell about 34% and 36%. The Nifty 50 itself has fallen about 15% from its record high in late September. The small-cap indices are down 24% and mid-cap 21% from their all-time highs.
Oil Prices Are Holding
Elsewhere, oil prices are still roughly in that $70 range, thanks to a weaker dollar, fears of a U.S. economic slowdown, tariffs, and a potential boost in supply by OPEC-plus countries. Crude has been supported in recent days by a weaker dollar, as we said, and the Energy Information Administration moving away from earlier calls of a strongly oversupplied oil market this year, according to UBS analysts who spoke to Reuters. Meanwhile, the Wall Street Journal reported the OPEC saying that it was sticking to its oil demand forecast as it prepares to start raising output next month, despite the other concerns about economic outlook.
The Vienna-based cartel still expects demand to grow by about 1.4 million barrels a day this year, and 1.43 million barrels a day the next year, thanks to strong air travel demand and sustained road use. The group's overall forecast remains more optimistic than others, for example, the International Energy Agency, which is estimating the year's growth at 1.1 million barrels a day.
Retail Inflation Is Down
As predicted and projected by a Reuters poll earlier, inflation is down and below most expectations.
Retail inflation is now down to a seven-month low of 3.61% in February, 25% from 4.3% in Jan, thanks to food price pressures which eased off. This brings inflation below the Reserve Bank's medium-term target of 4%. A Reuters poll of 45 economists had forecast February's inflation at about 3.98%, so the figure has come in lower. Industrial output for India, meanwhile, has picked up to 5% year-on-year in January, compared to 3.2% in December 2024, according to the business standard which compiled it. Inflation is now down because food prices are low. Food inflation has declined to about 3.75%, a sharp fall from about 6% in Jan, thanks to lower prices in vegetables, eggs, meat, fish, pulses, and dairy products. There is a problem in edible oil prices, which would have otherwise brought down inflation to even lower levels, and edible oil prices are high because of high import duties which were imposed last year. Food prices overall tend to fluctuate, and there is little overall control on the key components like tomatoes and onions. Bank of Garuda Chief Economist Madan Sapnavis said that with inflation coming down to less than 4% and likely to remain low in March too, there is a good chance of a further repo rate cut in April, given that the Reserve Bank has been doing everything to provide easy flow of liquidity.
Another 25-basis-point cut can be expected in April, he said. The rupee stays flat The rupee was nearly flat, with forward premiums dipping on Wednesday, said Reuters, with traders awaiting consumer inflation data from India and the United States. The rupee was at about Rs.
87.22 midday on Wednesday, and not much changed from its previous session of Rs. 87.21. The dollar index was up on Wednesday after falling to a five-month low on Tuesday and was last quoted at about 103.6. Asian currencies were also weaker compared to the previous day.
Where Should Capital Gains Go?
There has been much discussion on capital gains tax, particularly in the context of sale of shares. Foreign institutional investors are set to pay even higher tax coming April, and many have pointed this out. The contrast is with countries like China and even America, where overseas portfolio investors don't pay tax on sale of shares.
Both, by the way, have a vibrant market for investors. It's quite clear now, though it may not have been a few months ago, that foreign portfolio investors play an important role in bringing in capital back with generally good quality research, which means it's not just about funds, but also where those funds go. This creates a virtuous cycle of sorts of good companies on Indian stock markets whose stock prices do well and others follow.
So the question is, should India be reducing taxes, which are high in any case? And if so, what are the arguments for it? I spoke with Ketan Dalal, founder of Catalyst Advisors and former All India Joint Tax Head and managing partner West, as well as member of PWC's India leadership team.
And I began by asking him how he was seeing the path for capital gains tax at this point going forward.
INTERVIEW TRANSCRIPT
Ketan Dalal: So, you know, the point is, Govind, just let's step back, look at the bigger picture. I was just looking at some numbers and the US at 30 trillion in terms of market cap and China at 6 trillion, roughly constitute about 80% of the global market cap. And obviously, India is obviously very small compared to that, although it is pretty important now.
Now, the US does not levy, you know, capital gains tax on the state equity from on a cross-border basis and nor does China. Now, if investors have to have a choice, and of course, China has its own set of issues, but if investors have a choice, Govind, logically, they will look at the fact that there is no capital gains tax in those economies. And therefore, you know, if you see from a parity perspective or a level playing field, not from our perspective, but from their perspective, they will look at this as an issue which discourages them to some extent.
Also, let's bear in mind that the rupee depreciation and the risks of investing in India would be, of course, the gains would also be higher, but the risks are also higher. And we have all seen in the last three months, the carnage that has happened. So, you know, they are also facing those risks.
So, these are the issues that they will look at. And therefore, from their point of view, the capital gains is a dampener. And remember the capital gains tax, by the way, is going up on April 1 from roughly 11.5%, 12% to roughly 14% because of the amendment made in the budget on 23rd July.
Govindraj Ethiraj: So, how does that affect?
Ketan Dalal: It will affect everybody, but it will also affect the FPIs. The 10% plus surcharge rate is going up from to 12.5% plus surcharge is the point I'm trying to make.
Govindraj Ethiraj: Right. And this has been an issue in the past, but usually, I guess, because when markets are doing well, people don't bring this up and it's becoming more pronounced because markets are going down. So, do you feel maybe there is some sort of balance which could be there?
Because if people are consistently asking or highlighting this problem, then it's a real problem. But if it's only highlighted when the markets are going down, then one would wonder whether it's more an issue of patience, which is not there.
Ketan Dalal: Honestly, as I said, the market going down has heightened this issue. There's no doubt about it. So, it's like saying that as it is, my gain has reduced.
And on top of that, I'm paying tax on the reduced gain. Because in my head, I computed the gain as an X and now it suddenly looks like X minus 30, for example. So, yes, it is there.
But I think, as I said, Govind, on a step back basis, if you look at the bigger picture, when about 80% of global market cap does not have this capital gain, they will look at this as an issue. So, what I was sort of pondering was that maybe the government could consider that if not the doing away with capital gains tax, maybe not at least have it as a 15 kind of percent, more or less the rate, which will be after April 1, it could be lower. And perhaps it could be computed in foreign currency terms.
Because if you look at FPI, Govind, when they started, which was 1992, remember this was a year after the industrial policy. That time the dollar was 25. It had actually been sort of devalued from 17 to 25.
Today, of course, we are at 87. So, every year on an average, on a sort of negative CAGR kind of concept, it has depreciated by about 3.5 to 4%, which is the differential rate of inflation more or less between India and the US. Now, therefore, if at least with a lower rate, if the gain could be computed in foreign currency, it would perhaps address some part of that issue also.
I think because that's an important point, computing gains in foreign currency, which is not so today.
Govindraj Ethiraj: Right. And let me ask a sort of more merit-based question. Why do some countries not have taxes on foreign portfolio investors investing in their country?
Like you mentioned China and the US. And why do others have it? And then as they do, shouldn't it be driven by parity with domestic investors versus, let's say, foreign to foreign?
Ketan Dalal: You're right. There is merit in saying why discriminate against our own residents. But I guess, Govind, that it is primarily being driven by the larger overriding sort of factor of wanting to attract investors.
And I mentioned, right, that the US is about, say, 22-23% of global GDP, but 70% or 65-70% of global market cap. Now, there is a lot of foreign investment flowing into the US. Of course, there's a huge amount of domestic investment as well.
China, on the other hand, also attracts foreign portfolio investors. It has, of course, had its own set of issues. And in spite of that, if it wants to attract, then perhaps that has been an overriding consideration.
There are, of course, certain economies that do have those taxes. For example, Indonesia has 5% of gross proceeds here, which I find a little strange. But we must also remember that if we are comparing with, let's say, a China as opposed to an Indonesia.
I mean, my sense, Govind, is that FBIs would compare like a China-India kind and less like an Indonesia-India kind. So I think that's an important consideration as well.
Govindraj Ethiraj: Are we only talking about long-term capital gains or do you feel that's where the debate should be or the short-term also comes in?
Ketan Dalal: Long-term and short-term both because remember, FBIs do tend to sort of pull out money. So maybe they could look long-term, at least, as being exempt. And because otherwise, the volatility of flows could be impacted.
But I think there is a case at least for reduction, if not removal. And there is a case for considering forex stocks. I think these are the two, at least as an alternative to reduction.
Govindraj Ethiraj: And I guess the way governments see it is that, you know, we've had a phenomenal run in the last four years. You know, markets have shot up dramatically. There's a lot of wealth that's been created, including through exits, tens of thousands of crores have been made, hundred crore apartments have been bought.
So someone should pay. And that's the way the government or the tax department would see it. And particularly this last three, four years.
How would you address their concern or their thought process here?
Ketan Dalal: It is a valid concern. There is no doubt about it. The only point is that from an FBI perspective, they look at it, not from the distinction between domestic and FBI.
So you said, you know, on par, you know, resident to non-resident or from their perspective. I think logic from our perspective should only be this. If we want them to come in and this is going to be dissuading, do we want them even at the cost of giving away some revenue or not?
I think that is going to be the key driver for that decision. And I think perhaps the midway answer is reduction and computing in forex because completely doing away is something which may be difficult for the government to take a call. Although if they really want to be on parity with China, I don't think there's a choice.
Perhaps look at only the long term and not the short term. Insofar as domestic is concerned, you talked about 100 core apartments, etc. So there are two points there to go with.
One is we also have to realise that the last three years has been an aberration insofar as mid cap and small cap is concerned. Remember that the large caps, many of them have not moved at all for three years. A lot of money has been made because of the FBI, partly FBI influence, but a lot of domestic influence as well.
I don't think that one is going to see anywhere near that kind of a move in the next three, four years. So one has to look at this going more on a going forward basis as opposed to what has happened in the last three years, which I think has been a substantial aberration.
Govindraj Ethiraj: And what do you feel is the amount that the government could forgo if they were to not collect this capital gains tax on foreign portfolio investment, roughly?
Ketan Dalal: You know, I tried to find out what the FBI collection is. I couldn't do that. But I did find out that the long-term capital gain on listed equity collection is about 98,000 crores in FY23-24, something like that, say one lakh crores.
I don't have a handle on the number, Govind, but I suspect that the FBI could have been 30,000-40,000 crores maybe. So yes, is it substantial? It is substantial.
I don't think it'll be more than that. But yes, it is substantial to that extent. And we are only talking of long-term numbers, right?
Govindraj Ethiraj: So we also had a new tax bill recently, which was the outcome of many months of deliberations, negotiations, 66 subcommittees and so on. What's your sense as we now look at it?
Ketan Dalal: You know, Govind, the listeners and the viewers in the core report are quite sophisticated and I'm sure they are aware of it. But I do want to clear one misconception. The new income tax bill, honestly, is simply a renumbering.
And if the expectation is that because of this a layman, you know, or even a Govind Raj Ithiraj would be able to make some sense by reading it, it is not going to happen because, you know, you might, instead of using the word provided that, you know, you may say notwithstanding, but that's neither here nor there. It's not going to move the needle. You know, 150 officers spending 60,000 man-hours on this exercise, if I put it mildly, is completely unjustified and the outcome is nowhere near what it should be.
Honestly, what we require is a redevelopment, at least in certain baskets, not just a restoration or a renovation, let alone a housekeeping. And I think what has happened is this is a housekeeping exercise. You have so many provisions in the Income Tax Act which are completely unaligned to, you know, today's reality and sometimes even yesterday's reality.
And some of those issues need to be addressed. Unfortunately, this renumbering kind of thing, when I honestly think it's a renumbering, there are one or two changes. In fact, some of those changes say, OK, I can access your laptop, etc.
So, in a sense, they are sort of more draconian, if I might put it that way. But on the substantive point, there is no change.
Govindraj Ethiraj: And what's an illustration of where you felt there could be change or there was a perception that there would be change, but it has not happened?
Ketan Dalal: I was not explicit. The mandate of the committee itself, the mandate was, you know, simplify language, get rid of redundant provisions. So honestly, there was no expectation.
But if I were to distinguish between expectation and hope, at least the hope was that there are four or five, then these are just illustrations. There will be many that could be addressed. So let's look at, for example, ESOP taxation.
For years and years, there has been a representation that you cannot tax ESOP at the point of exercise because that is not the stage of monetization. You may compute the tax at that stage, but before it to the stage of monetization. That does not happen.
There are so many provisions relating to, let's say, mergers and acquisitions, which is a very critical activity today, which are out of sync with reality. Let me give you one example. If a manufacturing company which is making a loss merges into another company, the loss of that manufacturing company is allowed to be set off.
But what about an NBFC? Because when the law was framed, it's a section called 72A COVID. I don't think they even envisage that a service company or let's say an NBFC company could have a lot because there were not that many NBFCs, for example, at that point.
And now let's see what happened with the IRS. The point I'm trying to make is that many of these provisions need a change. They badly need a change.
And many of these changes are not being done in spite of the representation. Those provisions were drafted in a different era. Today we are in a different era.
So I don't think the new income tax bill will help. And my other worry is moving this, the fear is that the government will say, but I've just made a new act. And why are you coming to a representation?
Let's say the February 2026 budget comes, OK, representation will start in October. If this bill is introduced, they'll say, but I just changed it. But you didn't.
What you've done is a renumbering. It's not a change. So I don't want to sound sort of an overkill on this, but this is the reality of the issue.
Govindraj Ethiraj: Ketan, thank you so much for joining me. As always, it is a pleasure speaking with you.
Ketan Dalal: Thank you, Govind. It's been a pleasure being with you at The Core Report. Thank you so much.
Temperatures Are Rising
Mumbai was 37 degrees on Wednesday. It was higher a week before.
And Delhi recorded its hottest day of the year on March 12th, with temperatures touching about 34.86 and 6.4 degrees above the usual average, according to the India Meteorological Department. Higher temperatures obviously portend a difficult summer for lives and livelihoods, with businesses standing to be affected. Last year, heatwaves resulted in lower visits to car dealerships, for example.
Other businesses would be affected too, including construction, where workers toil in the hot sun, apart from a lot of other work that takes place in the open and more so in countries like India. The heatwaves last year, again, were followed by unprecedented drains, which also affected businesses, including auto sales, to quote that same example again, because we do follow them closely.
The Latest Tariff Wars
And in the latest in the tariff and utterly random wars, President Donald Trump's increased tariffs on all US steel and aluminium imports, and that took effect on Wednesday, the administration-friendly Wall Street Journal quoted Commerce Secretary Howard Lutnick, saying over the weekend that the president tariffs would make some foreign products more expensive, but American products will get cheaper. Per, says the Wall Street Journal, companies that use foreign components will have to raise prices or swallow narrower profit margins.
Does Mr. Lutnick understand? Well, commerce, asked the WSJ. It also pointed out that the US source is about two thirds of its primary aluminium and 60% of scrap aluminium imports from Canada.
Both are used by secondary US aluminium manufacturers and fabricators, which oppose Mr. Trump's tariffs. And they have a hard enough time competing with lower cost producers in China and Turkey. Canada makes up for a smaller share of US steel consumption, about 6%, says the Wall Street Journal.
But Mr. Trump's tariffs will raise costs for steel users that depend on Canadian suppliers. Hot-rolled coil steel prices are up a third since Mr. Trump took office because US manufacturers like Cleveland Cliffs and Nucor have already raised prices in anticipation of tariffs. The European Commission has already responded, saying it will impose counter tariffs of up to 26 billion euros, or that's $28 billion worth of US goods, often with more symbolic than economic impact, according to the Wall Street Journal.
China said Beijing would respond. Canada, Britain, Australia have criticised with Canada mulling reciprocal actions and Britain's state minister saying all options were on the table. Australia's prime minister said the move was against the spirit of the two nations enduring friendship, but ruled out tit-for-tat duties.
The countries most affected by the tariffs is the WSJR Canada, the biggest foreign supplier of steel and aluminium to the US, Brazil, Mexico, and South Korea, all of which have enjoyed some levels of exemptions or quotas.
