Vaccinating all Indians, for free
The markets are at an all-time high. Impose a Covid-19 surcharge on transactions and use it for vaccination
India has started vaccinating citizens against Covid-19. As more people get vaccinated, we can slowly start to shed our fears and masks and return to a more normal life. But there are still hurdles to cross before we can move to a true post-covid era.
The most significant hurdle is the cost of vaccinating more than a billion Indians. Other challenges include the logistics of vaccinating such a large population and navigating the economy carefully in the interim period before we reach the vaccination finish line. But the most conspicuous questions as India embarks on the vaccination drive are — will the vaccination be free and who will pay for it?
Other than the health benefits, it is obvious that the economy will benefit enormously if most Indians are vaccinated. Economic activity will slowly be restored to pre-covid normalcy. Sure, some sectors of the economy will recover faster while others such as travel and entertainment may be laggards. Perhaps, it is prudent that the sections of the economy that will stand to gain immediately may be tapped to help fund India’s vaccination drive — a “win-win” as they say in the corporate sector.
India’s stock market and the financial economy are certain to benefit almost immediately from the vaccination drive. Stock markets react to future expectations of economic and corporate sector performance. As the vaccination progresses, industries may take time to return to full capacity and companies may take several months or years to get to their precovid levels of revenues and profits. But the stock market reacts sooner to factor in the inevitable return to economic normalcy.
When the nation was under a total shutdown, India’s stock markets were brimming with activity. In the ten months between April and December last year, when 130 million jobless Indians were toiling in the sun to earn the paltry wages of ₹200 a day under the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS), a few thousand investors bought and sold shares worth $155 billion and bet on a trillion dollars worth of financial derivatives (notional value) in India’s stock market. The activity in the stock market during the lockdown was 60% higher than in the same period last year.
Despite the lockdown, the top 50 companies in India’s stock markets added $35 billion in wealth. India’s stock market indices are at their highest levels ever. The prospect of freedom from Covid-19 by vaccination is bound to excite India’s stock markets further and turn them even more “bullish”. A tiny tax on stock market transactions can help fund India’s vaccination drive without burning a hole in the fat wallets of stock market investors and give the government fiscal headroom for other expenditure to help save lives and livelihoods.
A Covid-19 vaccine surcharge just for the next fiscal year (FY2022) could be added to the securities transaction tax (STT) structure on stock market transactions. Currently, trading in shares carries a 0.1% STT while financial derivatives have a complex STT structure of varying rates for varying products. The surcharge can be an additional flat charge of 0.1% (10 basis points) on the value of all buy and sell transactions in shares and derivatives in the stock market. So, if a buyer buys shares worth ₹1 crore from a seller, both the buyer and seller will pay just ₹10,000 each as a Covid vaccine surcharge. While this may be an additional burden on stock market investors, it is a mere pinprick for them but one that could help inoculate a billion Indians and nurse India’s $3 trillion economy back to health quickly.
The government earned ₹12,800 crore from STT last year (FY2020). Given the 60% increased activity in the stock markets this year, the government may earn ₹20,000 crore in STT in FY2021. With a Covid vaccine surcharge, the government can potentially earn an additional ₹20-30,000
crore next year (FY2022), to be used exclusively for India’s vaccination drive. All Indians above 18 years can be vaccinated for free with this additional revenue for the government. The economic benefits of a vaccinated population will be reaped quickly by stock market participants as the economy bounces back faster.
Financial economists and market participants will expectedly argue that such a transaction tax will deter investors from the stock market and trading volumes will plummet. This is mere fear-mongering. In the 15 years since STT was introduced in March 2005, rates have been increased four times. But there has been no consequent reduction in stock market activity. On the contrary, trading in shares has more than doubled and trading in derivatives has increased 12 times in the in the last decade. There is simply no evidence to show that a small transaction tax has caused investors to abandon the lure of profits from India’s booming stock markets.
Central banks across the world have pumped enormous liquidity into
the global financial sector, which is now awash with cash and searching for investment opportunities. A fully vaccinated India coupled with the prospect of a faster economic recovery is a mouth-watering investment opportunity for global investors. Hence, it is even less likely now that a small one-year transaction tax will drive investors away, especially when the tax proceeds are used to pay for vaccination which will only help the economy and the stock market investors immediately.
Before economists argue over demand versus supply side policies for the Covid-19-impacted economy, the necessary condition for a strong economic recovery is conquering the coronavirus by vaccinating all Indians.
The brahmastra for this battle may be found in Mumbai’s Dalal Street and its “warrior” investors.