ALL tax changes relating to capital market came into effect from October 1, 2004. The imposition of transaction tax and changes in capital gains tax will have far-reaching implications on the Indian capital market.

The removal of long-term capital gains tax and the reduction in short-term capital gains tax provide excellent incentives to investors, and should lead to an increase in both direct and indirect ownership of equities by domestic households — the level of which had declined over the past decade, from 6.5 per cent to 3.9 per cent. We expect these changes in the capital gains taxes to boost the equity market over the long-term.

The economic outlook for current year, at 6.5-7 per cent GDP growth, is still robust, though lower than in the previous year, due to lower agricultural output. However, even at these growth rates, India will remain one of the fastest growing economies in the world.

Growth in the manufacturing sector continues to gather momentum, and we can see the first signs of large investments being made by manufacturing companies, to augment capacity over the next few years. Investor interest in Indian equities, both local and international, continues to rise.

There is a clear belief in the long-term India story, as is evident from the higher inflows into Indian equities witnessed over the past year and half. Even in September, we saw inflows of $0.5 billion from FIIs. This gush of liquidity is bound to have some impact on prices in the near term.

The price of crude oil, now hovering at $50 a barrel, continues to remain the largest concern for both, India and the global economy. Oil is India's largest import but India is one of the most inefficient users of oil. Though the economy has shown tremendous resilience in the past — and even now — to higher oil prices, if oil prices sustain at these levels, they can drag economic growth down.

(Extracts from Kotak Fact Sheet, September 2004)

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