“The government of India has not changed its taxation or regulatory policies for this. It (bond inclusion) is a reflection of the record of fiscal prudence,” Somanathan told FE.
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JPMorgan Chase & Co.’s decision to add Indian government bonds to its benchmark emerging-market index was its own decision without any tax concession by India, finance secretary TV Somanathan said on Friday.
“The government of India has not changed its taxation or regulatory policies for this. It (bond inclusion) is a reflection of the record of fiscal prudence,” Somanathan told FE.
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The bond inclusion without any capital gains tax concession on the bonds indicates the attractiveness of India, which has been recognised to be the fastest-growing G20 economy in 2023- and 2024.
Currently, appreciation in bond prices is considered capital gains and subject to tax. Short-term (less than 12 months holding) capital gains are taxed as per the applicable slab rate of the investor while long-term capital gains are taxed at 10% without indexation and 20% with indexation.
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Even though India has been exploring with index service providers JP Morgan and Bloomberg-Barclays for the overseas listing since 2019-20, the progress was stalled due to the government’s stand not to give any exemption from applicable capital gains tax.
Chief Economic Adviser V Anantha Nageswaran said estimates suggest that the G-secs inclusion could channelise $20-26 billion long-term foreign patient funds to India, relieving the Indian financial institutions from investing heavily in G-secs. It may also bring down the cost of capital for Indian bond markets “even further”, Nageswaran said.
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“It will also in a way relieve the Indian financial institutions from having to be one of the biggest buyers of subscribers to G-secs, and they can actually lend that money for more productive purposes, to the private sector or commercial sector or individuals, etc,” Nageswaran said.
“Naturally, the financing of the current account deficit also becomes that much easier because it is, by and large, believed that these investors are long-term efficient investors and they are not fearful or hot money flows,” he said.
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Some brokerages estimate that at nearly $1.2 trillion, the Indian government bond market is the third largest among emerging economies after China and Brazil. Yet, the foreign ownership of G-secs is less than 2% now as India was a notable exception among the major emerging markets bond indexes and this development will rectify that exception, he said.
There is also potential for currency appreciation when the index inclusion starts to happen, and investors’ demand for Indian government securities start to rise, Nageswaran said.
India’s bond inclusion will start on June 28, 2024, and extend over 10 months with 1% increments on its index weighting, as India is expected to reach the maximum weighting of 10%.
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