In the wake of the economic downturn caused by the Covid-19 pandemic, the government reported a decline in tax collections. In addition, foreign investors sold over ₹1 lakh-crore securities during March, marking the event first of its kind in history. Furthermore, the Reserve Bank of India (RBI) resolved to reduce foreign exchange and money market product trading hours.
Drop in Tax Collections
Tax collections, including both direct and indirect tax, faced a fall. Direct tax is charged directly on an individual or organization by the entity imposing it, with income tax being a prime example. The government’s net direct tax collections missed the adjusted target for 2019-20 by Rs 1.42 lakh crore, amounting to a overall collection of Rs 10.27 lakh crore. This signifies an over 8% decline from the previous year’s receipts. This contraction in direct tax collections breaks a 20-year streak, with the last year-on-year decline seen in 1998-99.
Indirect tax, collected at one stage of the supply chain but passed on to the consumer, also saw a dip. Goods and Services Tax (GST), a type of indirect tax, fell below the government’s targets. Reasons contributing to this decrease include a 7.8% drop in filing returns from the previous month, a 4% decline from the past year in domestic revenue, and a sharp 23% dip in revenue from imports.
Outcomes of the Tax Collection Decline
The government is likely to miss its revised fiscal deficit target of 3.8% for 2019-20. Additionally, the fiscal deficit from April to February rose to 135.2% of the revised estimate for the financial year 2019-20.
Foreign Investors Retreat
For the first time in the history of the Indian capital markets, Foreign Portfolio Investors (FPIs) sold securities worth over ₹1 lakh crore in a single month (March 2020), as per data from the National Securities Depository Limited (NSDL). This accumulation of net outflows from debt and equity segments was more than double the previous record. Market participants suggest that the ongoing Covid-19 pandemic causing worldwide stock fluctuations is the core reason for such record outflows.
Impact on Sensex
The Sensex reported its worst monthly decline in over 11 years as a result of these sales. However, purchases by Domestic Institutional Investors (DIIs) acted as a powerful counter to foreign investors selling.
National Securities Depository Limited
The Depositories Act enacted in August 1996 facilitated the establishment of NSDL, which manages a majority of securities in dematerialized form in the Indian capital market. NSDL supports investors and brokers in India’s capital market by developing settlement solutions that enhance efficiency, minimize risk, and cut costs.
Domestic Institutional Investors
Also known as DIIs, they invest in securities and other financial assets based in their own country. Banks, insurance companies, mutual funds, and domestic financial institutions fall under this category.
Trading Hours Shortened
The RBI has chosen to cut trading hours for certain financial products between April 7-17 in response to the challenges posed by the lockdown imposed due to Covid-19. The revised trading hours, moving from 10 am to 2 pm instead of 9 am to 5 pm, apply to multiple financial dealings such as Call/term money, market repo in g-secs, tri-party repo in g-secs, commercial paper certificates of deposit, repo in corporate bonds, and foreign currency and rupee trades.
