We woke up this morning with an innocuous headline about the Brazilian elections. The incumbent leader Lula had defeated his pro-American opponent Bolsonaro to retain power for a record fourth term. What followed was pure chaos- the Brazilian Real fell 12% against the Dollars and the headline Ibovespa index plunged 17% at the open and is still down 15% as I write this piece. It was a means to convey to the Brazilian public that if they choose to elect an anti-American person as their leader, their economy will face the brunt.
To my mind, this event has closed all doors regarding any potential tax cut for the FII and would rather usher in tighter capital controls and possible higher taxation. Here is why I think so:
The Americans, especially Trump had openly supported the opposition candidate in the Brazilian elections and there was a strong buzz in the US media regarding his victory. The Brazilian market was also up massively in the lead up to the elections. So the FII money conveyed what it wanted the public to vote for and since the outcome was against their wishes, the hot money took the first flight out of Sao Paulo. If this is not economic colonization, what is! Look around the world and a pattern emerges. The Indonesian rupiah and its market have suffered massively because of a potential MSCI downgrade. The US treasury secretary has openly advocated economic warfare to get countries to toe their line regarding the Iran and Ukraine war. Don’t you think that New Delhi understands this!
I have earlier felt and now am increasingly convinced that the FII selling in Indian markets is strategic. It’s a way of conveying their preferences for a particular set of political setup and policies. Add this to the consistent anti-regime protests funded by the usual deep state actors. As a student of geopolitics, it is obvious to my mind that these two are interconnected and the relentless selling will continue to create an environment of gloom and doom amongst the larger public.
Vikram Sood, the former RAW chief in his brilliant book Great Power Games has elaborated in detail that in the current world order when the US is no longer the paramount hegemon, they are wary of a rising India. Their officials have on record stated that the US does not want to repeat the same mistake with India as they did by facilitating the rise of China. It is no coincidence that Brazil & South Africa are also important members of the BRICS which is the most likely challenger to the US led world order. BRICS has also talked about a potential currency of its own to challenge the Dollar and thus, the repercussions. It cannot be a mere coincidence that whichever country has talked of getting off the dollar has found its leader either killed or kidnapped- Gaddafi and Maduro being the most prominent examples.
It is in this backdrop that I state that any hopes of a tax cut for the FII is misplaced and what we should brace ourselves for are tighter capital controls and higher taxation. Let me illustrate through two recent incidents.
John Gray of Blackstone publicly praised India for being an ultra-liquid market wherein they can easily list their holdings and take money out and the FM talked about how excessive liquidity is allowing the FII to take money out. In such a scenario, it is obvious that any policy maker sitting in New Delhi must be very worried with the events in Brazil and will do everything possible to avoid such an event in our own markets. If I am able to connect the dots, don’t you think that the PMO and the Finance Ministry would already have come to the same conclusion. Imagine the kind of chaos if our nifty falls 15% intraday or if rupee falls 5%. It also explains the especial emphasis the RBI has placed on a particular level of the Rupee and why there is zero chance of a tax cut and that too for the FII.
When it has been deduced that the FII selling is strategic, will a tax cut not aid the outflow! If they are happy paying 12.5% to take money home, they will dance their way out if you reduce the rate. Since the government and the RBI has already taken a number of steps to stem the flow, it is only logical that if the selling continues from here, a higher LTCG is coming because if we can’t stop the FII, we can at least retain part of the earnings in India. Also, for reasons of fiscal prudence, it is natural that the government does not have the wherewithal to reduce the STT.
To those clamouring for an FII tax cut, I would politely remind them that the policies aren’t made just because our portfolios are not performing. There is a larger world away from Dalal Street. As a rational market practitioner and a proud nationalist, we must always try to advocate policies which are in national interest!
