Money, as a long-term source for business, comes in broadly two forms:
(a) Equity & (b) Long term Debt .

The form (a) brings comfort and smartness in the business whereas form (b) comes as a load. Both have to be serviced and both appear on the left side of the Balance Sheet (traditional form of Balance Sheet). Surprisingly, despite Equity being costlier to service as compared to Debt Servicing, the former is done cheerfully whereas the latter is treated as a burden. Ever imagined why so?

Equity money is Growth capital. It comes with brain – the smart money as they say, that promotes Entrepreneurship & business. No business gets created without Equity. It is this money that flows first and then follows the debt – never the reverse order. It is the Equity money which gives birth to any Enterprise – Debt money only follows.

Why there is unemployment & Why private investment is not picking up?…. Now if the Government of the day is serious about it and wishes to promote private investment, it has to encourage Equity culture in the economy. Is it doing so? I have my serious doubts. Let us dive a bit deeper.

1. To promote Equity savings instead of Debt savings, there has to be some fiscal advantages to promote Equity or some dis-incentive to accumulate Debt Savings. How can this be achieved? Well, at least not by introducing Long Term Capital gain tax or by taxing the Dividend (which is so bad in law). Instead, the Government should travel one step forward by abolishing all forms of taxation on Gains out of Equity investments. In any case, gains on Equity markets are not a part of the GDP, then why tax them.

Imagine the kind of Equity investment flow (Risk capital) that will occur, thereby kick-starting private Investment.

2. Disincentives Debt savings. Tax the Interest income severely (one can look at giving exemption to senior people). I have seen young generation surviving on interest income from funds bequeathed to them by their parents / grandparents. They should be taxed at penal rates. These are people who slowly become rent seekers making the money “DUD” and removing the smartness from it. Even “Islam” preaches not to earn interest and terms it as “Haram earnings”. Why can’t the present economists & policy makers borrow something from these holy books and figure out a good solution – if they can’t think o their own.

3. Simpler way might be to reduce the interest rates on Debt Savings. If the constitution doesn’t allow banning it, or taxing it at penal rates – simply reduce the bank rates in the economy. Look around in developed economies. Analyze the difference between the prevailing 10-year benchmark yields and the yields from Equity markets. The latter would be easily 8-10x of the former. Why then India still hovers around 2x (the ratio of Equity yield to Debt yield). Why can’t India reduce the Interest rates / bank rates drastically? The reason – our credit policy makers. They are learned people, but as they say, most of the learned people are fearful. We will have the Credit Policy makers screaming that cheap money might lead into hyperinflation, chaotic economic crisis, flight of dollars back etc?….They might have a merit, but even Demonitization was opposed by such bankers. We see the fruits of it now with increased number of tax payers etc. I find all such fears more as hoax or maybe temporary bumps…

4. Let us deliberate on what could happen and maybe start a discussion so that it reaches the policy makers doorsteps…

We might look at the following therefore..

a) The inflation might rise momentarily but once the supply side is taken care (after good private investments that will happen) – this inflation will settle down. Time-lag between new investments and its supplies might be a temporary hurt-period.

b) The reduction in interest rates might jack up the price of INRUSD pair but it will serve as a good natural protection to the domestic industry and a big push to the make-in-India program. Thereby generating employment. Once this pair (INRUSD) rate settles – it will be business as usual. In-between certain importing industries might take time to settle.

c) With reduction in domestic interest rates – the private industry will become more competitive in international markets and will look forward to expanding and increasing capacities further promoting private investments.

d) Reduced interest rates will promote internal consumption which will further fire the domestic demand & subsequent production.

e) Regarding flight of Dollars – we have enough chest now with us – that such surgical strikes can be withstood. And what if the public has to sacrifice on Oil consumption / or any import consumption. As a nation, we should have belief in ourselves that we will not only survive, but stand up and run. The difference this time – that it would be on our own national pride.

5. I also carry a slight confusion on this so called WPI index and would like to questions on its constituents even. It is this figure that is feared by our Central banker to soar when cheap money is available and might dent into the Gross GDP number. I feel we as proud citizens of this nation – should deliberate on this number and question on how it is derived. It could be incorrect and favoring some interested parties not aligned with national interest.

Over the years, the Indian population has been pushed into living life that mimics western way of living. This could have been ill advised to them as signaling an improvement in standard of living consequently few items participate in the index formation. Not that most of it is wrong – but few might be done away with by adopting a frugal lifestyle in sync with the natural environment of the local geography rather than imitating the outside culture. This should be the next PM talk to masses – maybe, to invoke the nationalist feeling within the masses and to shun away goods that are not necessary but a load on foreign exchange. I am sure the real WPI (items necessary for a good Indian living) could be slowly adopted that could boost the local industries.

6. The following steps if taken by policy makers should yield the necessary private investments and the employment generation required by this young population…

a. To remove all Capital gains on incomes from Equity savings – to promote equity culture and strong inflow of Growth capital for private enterprise.

b. To introduce fiscal advantages for Equity savings and Dis-incentivize Debt savings…. (please note that I haven’t undermined the importance of savings)

c. To accelerate the reduction in Interest rates prevalent in the economy so as to make the Equity earnings almost 5X of the Debt earnings and only increase this difference from thereon.

d. To allow the INRUSD pair appreciate because of above steps, and to ensure that this rise is smoothened instead of showing spiked movements.

e. To speak to masses – direct dialogue with public (PM Mann-ki-baath etc) and request them to adopt frugal standards of living. To handle this shift in a peaceful way – as the step of GST was handled.

Let us debate and share this thought – so that it at least starts a chain-reaction reaching the right people and forcing them to think for some plausible surgical solution.