Tap Stock Market Wealth For a Stimulus

Context: A one-off tax on windfall gains from the current equity rally could help the government spend more.

Rise of Stock Markets: 

• Stock Markets have been soaring in contrast to the woeful state of the economy.

• The S&P 500 has risen by more than 50% from its March lows.
• The BSE Sensex is up almost 50% in five and a half months.

• Reasons: 

• Massive Liquidity Infusions by the Central Banks:

• The Reserve Bank of India (RBI) has pumped in more than ?10 trillion since February to spur credit creation, which has led to asset price rallies.
• Gold prices had touched an all-time high recently, which was ordinarily used as Risk Aversion.

• Manipulation of Markets: by the companies in the form of stock buybacks, which pump up the price-to-earnings ratios.

• For E.g. In the past five years, American companies have used up $1 trillion every year to buy back their own shares.

Steps Taken by the Governments: India Injected equivalent to 1% of the Gross Domestic Product (GDP) for :

• Increased Food Ration
• Direct Cash Transfer
• High Grain Procurement support prices
• Doubling of funds for India’s rural development – acting as unemployment insurance.

Challenges of Resource Mobilization through borrowings: Recent suggestion regarding floating of COVID bonds outside of the budgetary process has the following limitations:

• It would raise the indebtedness of the government.
• Triggers a rating downgrade.

Way Forward: Apart from Monetization of Deficit, funding for the government outlay can be arranged from the following avenues:

• Pledging Government Shares in public sector companies to the RBI.

• Since a stimulus thus financed would help India’s growth prospects, it would also presumably prop up prices of the pledged stocks themselves.
• Resultant capital gains could help partially redeem the repo loan.

• Taxing the windfall gains in Stock Market: An ultra-loose monetary policy itself is causing equity wealth to rise and has worsened income inequality.

• This idea goes back to a tax imposed by the Jimmy Carter administration in the 1970s.
• This aligns with the government mandate to redistribute the income to those who have lost incomes and livelihoods.