Double whammy for investors
India Diary
By COOMI KAPOOR
Policy-makers in India no longer talk of a double-digit growth. Business confidence is so low that more Indian industrialists are investing abroad rather than expanding and launching fresh projects at home.
THE economy is slipping. Gone is that rude confidence encapsulated in the "India Shining" slogan of a couple of years ago. Rarely will you come across an industrialist who does not agonise over what he calls policy paralysis these days.
Policy-makers no longer talk of a double-digit growth. Business confidence is so low that more Indian industrialists are investing abroad rather than expanding and launching fresh projects at home.
Though the GDP growth rate has been sliding for several quarters now, and critics lament the lack of initiative by the Government to take decisions critical for economic growth, two separate events have confirmed that the rot is much deeper.
First, the warning from the Chief Economic Adviser to the Government, Kaushik Basu, who told a Washington think tank in mid-April that the process of economic reforms could be revived only after the next parliamentary election in 2014. He was accompanying Finance Minister Pranab Mukherjee to the US capital for the annual World Bank-IMF meetings.
After the Opposition seized on his remarks to pillory the Government, Basu claimed he was quoted out of context. The reference to 2014 was not about the next Indian parliamentary elections but to the year when massive European Central Bank loans to the hard-pressed EU member-nations would come up for maturity and could result in a possible default, triggering a global financial crisis. But nobody believed the denial. They contended that Basu, an economics professor from Cornell University currently on leave, spoke candidly.
The second warning of a slowdown came in the last week of April from the global ratings agency, the Standard and Poor's. The agency lowered the sovereign rating of India from stable to negative, warning of a further downgrade if there was no progress on macroeconomic reforms and fiscal deficit. The Government made light of the warning, maintaining that economic fundamentals were strong.
However, independent economic experts are concerned about the rising current account deficit and growing fiscal deficit. CAD rose to four per cent of GDP in the financial year 2011-12 as against 2.7% in the previous year. Simply put, India is importing far more than it is exporting. Besides, foreign exchange reserves are declining while foreign debt is rising due to a variety of factors.
The net inflows into the equity markets from foreign institutional investors have come down in recent months, a fact reflected in the listless trading on the stock exchanges. The bellwether Bombay Stock Exchange Sensitive Share Index has been on the losing streak, slipping to its lowest this year at 16,546 points on Tuesday. A year ago the Sensex was close to 19,000 points; last month it was well over 17,000.
Thanks to the slowdown and the resulting reduced inflows in the equity markets by the FIIs, the currency has depreciated the most in recent months. This is a double whammy for foreign investors.
For, the steep fall in the Sensex coupled with the sharp depreciation in the Indian currency has meant a big erosion in their investment in share markets. The fiscal situation is equally bad. The Government has been spending far beyond its income. Several entitlement schemes such as the rural employment guarantee scheme, the subsidised food rations scheme, etc. are burning a huge hole in the public finances. Besides, the Government is losing massive sums on the sale of petroleum products. Overall, the combined deficit of the federal and State governments is over six per cent of the GDP.
Aside from the adverse global cues, there is no denying that the economy has suffered from neglect by the ruling coalition. The will to push the reforms process has been missing. Mired in its own existentialist crises and dogged by internal dissensions, the ruling United Progressive Alliance Government of Prime Minister Manmohan Singh, critics argue, has virtually become a lame-duck long before the next parliamentary poll which isn't due till May 2014.
Even the recent annual budget for 2012-13 seems to have acted as a dampener on growth, with foreign investors feeling miffed by proposed retrospective changes in tax laws. Investment climate was marred when the Government sought to empower itself to change tax provisions with retrospective effect going back to 1962.
The attempt to undo the ruling of the Supreme Court in the Vodafone case too has sent a wrong signal to foreign investors. In this case, the tax authorities slapped a capital gains demand of over US$2bil (RM6bil) on Vodafone, the European telecom major. It had bought the majority stake from the Hong Kong-based Hutchison Whampoa group in the Indian telecom company. The IT authorities argued that Vodafone was bound to pay the capital gains tax since the company earned its profits in India. Vodafone countered that it was a foreign corporate entity and not liable to pay such taxes in India. The Bombay High Court found merit in the IT department plea. However, on appeal by Vodafone, the Supreme Court rejected the Government case.
Now, Finance Minister Mukherjee has proposed that the tax laws be re-written retrospectively, going back to the 60s and pointedly insisted in Parliament that he would not provide any relief to Vodafone.
Despite the British Government taking up the Vodafone grievance at the highest level in India and criticism in the Indian media, the stubbornness of the Finance Minister has come as a huge dampener for foreign investors.
Writing in the authoritative Business Standards on Wednesday, May 9, Singapore-based economist Rajeev Malik commented that "there are three institutions that keep India running – the Supreme Court, the Election Commission and the Reserve Bank of India. To be sure, most of the economic mess in India has the Government behind it. And often the RBI is called in as a vacuum cleaner. But even the best vacuum cleaner cannot be successfully used to clean up a garbage dump."
The short point is that the economy is hurting. Those whose job it is to heal it are busy squabbling or warding off crises of their own making while protesting that the economic fundamentals are strong. Really?
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"To those who believe in resistance, who live between hope and impatience and have learned the perils of being unreasonable. To those who understand enough
to be afraid and yet retain their fury."
Sent on my BlackBerry® from Vodafone
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