On Monday (7th May), India’s Finance Minister tried to undo the damage that his budget presented early in March had caused to investor sentiment towards India. More specifically, retrospective amendments to Indian tax laws and the implementation of General Anti-Avoidance Rules (GAAR) sowed confusion and led to heartburn. It was not so much that the GAAR was an odd regulatory intervention by India. There is international precedence. But, the timing was a matter of poor judgement. India depended on foreign fund flows, given the current account deficit. There was no semblance of consultation, preparation time, etc. Even granting the desperate nature of these amendments given India’s high fiscal deficit, the introduction of the moves failed to take cognisance of the damage it would cause to growth through exit of foreign investment. Growth impact would lead to less tax revenues, nullifying the intent of law. It was a combination of hubris and ignorance. This blog post in Reuters captures it rather well.
As for what the Indian Finance Minister did, he postponed the implementation of GAAR by a year. But, some details are fuzzy. The postponement might apply only to those deals structured in jurisdictions with which India has a double-taxation avoidance treaty. The onus of submitting proof that tax avoidance was the objective rests with the taxman than with the defendant. There is now provision for an independent private sector participant in the proposed GAAR panel. The rate of capital gains tax on private equity investments has been halved. For those interested in details, the Reuter Factbox is rather useful.
In addition, the government announced that angel investments above par value would not be deemed as ‘Other income’ in the hands of start-up companies. The levy of import duty on gold imports has been withdrawn.
While these are doubtless welcome, the larger question of the quality of the process of policy-making in India remains unanswered. Hence, the damage done to sentiment on India remains. Some of the criticism India has attracted is, no doubt, motivated and unfair. But, India is hurt. The rupee remains under pressure, even though it is cheap on many counts. The stock market is not cheap yet. With the global risk appetite taking a justifiable turn for the worse, it is hard to see the rupee recovering quickly, even if central bank actions put a floor under the currency.
India’s domestic car sales plunged in April, dropping 26.8% (m/m) from March. Local passenger car sales dropped to 168,351 vehicles from 229,866 in March. The series is volatile and it is not seasonally adjusted. The volatile Industrial Production data again bared its teeth. In March, the overall index of industrial production contracted 3.5% on an annual basis. But, on a month-to-month basis, the sub-index for capital goods production jumped 18%.
But, it appears either that Indian bureaucrats cannot wait to get back to the command and control economy or that they have embraced a death wish for the country. Regardless of whether this news-article is exaggerated or not, the fact that the Competition Commission is seeking powers to conduct ‘search and seizure’ raids and that it is questioning the selective distribution of Apple IPhone products in India leave one speechless.
Not that we had much hopes for the Government of India to make symbolic moves on foreign investment. But, it has decided to suspend attempts to open up the insurance sector. Reform – genuine, needed or symbolic or superficial – has become a dirty word in Indian political lexicon again. This is genuinely an achievement of the UPA government. The people who spoke at the recent launch of a book (festschrift) to honour Dr. Manmohan Singh on his legacy of reforms really could not get around to say that their emperor had no clothes all along – actually from 1991 itself.
Someone like Tyler Cowen is genuinely worried about India. So should we be.