Sucheta Dalal :Real impact of transaction tax on people's life
Sucheta Dalal

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Real impact of transaction tax on people's life  

Jul 26, 2004


If television viewership could be metered more precisely, the huge upward spike at 2 p.m. Wednesday, July 21 would have revealed how many people’s lives depend on the capital market and are affected by its trends. It was the time that Finance Minister P. Chidambaram was to reveal some rollback of the Securities Transaction Tax (STT) announced in the Budget. The tension was palpable. Anyone connected with the market, including those who have little acquaintance with news channels, was glued to a television screen. Childishly, many expected the Finance Minister to go directly to the transaction tax announcement; instead, he raised the tension by launching into a mini-Budget speech.

If stock prices were already a little upbeat, it was mainly because a large industry group was an aggressive buyer that morning. But if it had prior information, day-traders weren’t in a mood to follow its lead. Half way through the FM’s speech, the BJP members disrupted proceedings based on an imaginary slight. If the BJP thinks of itself as a trader’s party, it certainly lost supporters that day. Even diehard followers turned abusive at their politicians’ antics, fearing that it would lead to a postponement of the STT announcement. And they cheered when the opposition walked out. The falling Sensex also began to steady.   

When the FM finally made his announcement, for a moment it was greeted with disbelieving silence. The rollback was far better than expected and the set off of transaction tax against business income was a bonus. The Sensex soared 82 points in a few minutes, but the fervour is clearer from the trading volume. The Bombay Stock Exchange (BSE) recorded a volume of Rs 280 crore in the last 15 minutes, out of a total turnover of Rs 1,570 crore.

At the National Stock Exchange (NSE), the last 30 minutes saw Rs 780 crore of trading, most of it concentrated near the end (the bourse could give only half hour data). Its turnover that day was Rs 3,600 crore. Within the hour, dealers, brokers’ employees and affiliates were out celebrating. At offices of debt brokers there were tears of joy and with good reason too. While theorists may debate whether speculation is good or bad for the market, to a few lakh people (brokers staff and various service providers) the FM’s announcement was to decide whether they would continue to retain their income or still have their jobs.

In a television debates after the Budget, a Communist leader sneered, ‘‘f brokers can’t even pay 0.15 per cent tax on their turnover, let them wake up and smell the coffee.’’ Maybe it is time to return that sneering and ask the so-called communists to take a good look at the variety of people (aam aadmi) who would have been affected by the STT decision that Wednesday if turnover had slumped and triggered a bear phase. Sure, they included flashy brokers and high networth investors with enough surplus money to invest in loss-making television companies; but in terms of sheer numbers, the larger group comprises thousands of non-unionised workers and those who provide what can be called ancillary services. Their income and livelihood varies with the tezi or mandi (bullish or bearish) in the capital market.

Who are these people who live by an uncertain market and don’t demand a greater return on their Provident Funds than the income it has earned? Let’s take a look at the capital market as an employer. There are 1,300 active brokers on the NSE and BSE’s equity segment and 75 in the debt market. Of the equity brokers, around 300 are tiny brokers with single offices, who provide direct or indirect employment to at least 25 support staff including peons, trading assistants, sub-brokers etc. Then there are around 500 mid-sized brokers who have up to a dozen branch offices or franchise operations, employing an average of 10 persons at each centre.

The 100-odd large brokerage firms have several hundred branches across the country with similar minimum employment numbers. Moreover, their main offices includes large teams of sales and marketing executives, dealers, analysts, risk managers in addition to support staff. Each of these brokers, irrespective of size have nearly a 100 ‘dependents’ whose only source of income is arbitrage deals on very thin margins. All this is just the direct employment from brokers; it excludes a few lakh people employed by Sebi, the many stock exchanges, depositories, depository participants, share registrars, custodians, investment bankers and mutual funds, each with their support service providers generating further employment.

Each broker and intermediary also creates business for courier companies (many of them are entirely dependent on capital market related business), printers and stationery suppliers. While trading is fully automated, brokers back offices are partly manual because investors still demand a physical copy of electronic contracts. Few remember that when the Primary Market collapsed after the excesses of the mid-1990s, several printing companies who had invested in new machines and technology for printing prospectuses and forms also collapsed. Then there hundreds of agents on contract with banks for a variety of capital market related services and are out of a job when the market is down. Their functions include facilitation of lending against shares, verification of credentials and even filling up forms.

All these people live by their wits and do not complain about the vagaries of the market. Compare this with government employees, who gobble up a big chunk of taxes collected. As one commentator said on a yahoo group recently, ‘‘It is amazing that average government employee’s salary and perks work out to Rs 2 lakh p.a. while India’s per capita income is just Rs 11,000.’’

Sneering communists and out-of-touch policy makers and bureaucrats often forget that the capital market is also a huge direct and indirect employer of people who have no job security or social security. When viewed in this context, the capital market surely begins to look just as important as Khan Market, and certainly more important than the unionised workers whose interests are the only ones that the communists seem to represent.

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-- Sucheta Dalal