Insufficient Capital for Growth, Warns Helios Capital’s Samir Arora
Despite widespread belief, Helios Capital’s Samir Arora argues that India lacks sufficient capital to sustain its growth trajectory, particularly without foreign investment. Capital gains tax on foreign investors may hinder India’s appeal, which impacts market performance, Arora suggested while speaking at an event by NSE marking Moneycontrol Pro’s million-subscriber milestone.
Dependency on Foreign Capital
Arora highlighted that much of India’s private equity sector depends on foreign capital. “Nearly every major private equity-backed company relies on foreign investments,” he stated, cautioning against assuming that India’s capital flow is self-sufficient. He emphasized that India’s current growth rate doesn’t reach its full potential, especially when viewed through the lens of foreign returns. “To truly appeal to foreign investors, growth should exceed the current levels,” he explained.
Capital Gains Tax Deters Foreign Investment
Capital gains tax on foreign investors, according to Arora, reduces post-tax returns, making India less competitive globally. “When accounting for capital gains tax, returns on Indian and U.S. markets are practically equal over 20 to 25 years,” he noted. He highlighted this “big leakage” in returns by comparing a prominent India-focused ETF (Indy ETF), which has underperformed by about 500 basis points this year. “The ETF is up 15 percent, while the index has risen 20 percent. Investors won’t stay content with this gap,” Arora said.
India’s Unique Tax Policy May Restrict Long-Term Investments
Few countries impose similar taxes on foreign investors, Arora pointed out, which could impede long-term investments. “Out of roughly 200 investable countries worldwide, India is among the few that taxes foreign investors,” he noted, underlining that this policy places India in a less favorable position globally for investment.
Post-Tax Impact on Attractiveness of Indian Markets
In a recent interview with Moneycontrol, Arora discussed how increased capital gains taxes could diminish India’s investment appeal post-tax. He expressed disappointment with some analysts who downplay these tax implications, suggesting that they may overlook the permanent impact on returns. “It’s surprising how analysts often miss the lasting effects of these tax changes,” he said.
Avoiding Overconfidence in Capital Supply
Arora urged caution, suggesting that India should not grow overconfident about attracting capital. “As a player in mutual funds, high taxes can be beneficial since investors pay taxes only upon withdrawal, not during transactions,” he said. Yet, Arora argued, the policy is a risk to the broader economy, emphasizing that “India should care about these foreign investors, rather than assuming their continued presence.”
India’s Capital Inflows Slow as Developed Markets Rise
Since October 2024, foreign inflows into India have declined, with high interest rates and favorable equity returns in markets like the U.S. dampening investor appetite in emerging economies. From October 23, 2023, to October 23, 2024, India’s BSE SENSEX rose by 22.60 percent, compared to the S&P 500’s 37.48 percent rise. Other indexes, such as Shanghai’s Composite and the FTSE 100, also saw lower returns than the U.S., underscoring the competition India faces in attracting investment.
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