Unease is deepening among investors as India’s weak political leadership fumbles to tackle a worsening economic slowdown, which has been largely caused by the policy makers’ follies.
Foreign direct investment in the June quarter plunged 65 per cent from the same period a year earlier to $4.64 billion, according to data from the Reserve Bank of India (RBI). While the sluggish global environment did contribute to the slump, the single-biggest factor that scared off investors was the government’s annual budget – widely seen as the worst in more than two decades.
Instead of salvaging an economy caught in the throes of a slowdown by giving incentives for investment, Pranab Mukherjee, the architect of the March budget, proposed changes to 50-year-old laws that would enable the authorities to claim taxes retrospectively from foreign companies such as Vodafone.
The British telecommunications company and other multinationals pay taxes in India on their earnings, but the government has been demanding a share of the capital gains – which are always the seller’s responsibility, not the buyer’s.
Vodafone bought the Indian mobile operations from Hong Kong’s Hutchison Whampoa in a deal struck overseas. The government’s contention asking Vodafone to cough up the tax was struck down by the Supreme Court.
“Mukherjee’s move to amend the law retrospectively smacked of petulance to overrule the country’s highest court,” said a money manager at a foreign fund. “It was a foolhardy decision and the stock markets are yet to recover from the shock.”
After the veteran politician quit and became the president in July, one of the first things the new finance minister P. Chidambaram did was to allay fears about the amendment. Another controversial move to tax investments from tax-havens such as Mauritius has also been shelved.
However, the government’s flip-flops have shook investor faith in the country and hurt foreign exchange reserves, which stood at $289.17 billion on August 10 from a record high of $320.39 billion last October.
Investors need stable and fair policies for making a call. A series of political corruption scandals have tarnished the coalition government of Prime Minister Manmohan Singh, who is increasingly seen as an ineffectual leader with no real power.
Two reports by the country’s independent auditor placed in parliament on Friday damned the government for crony capitalism that served to fatten some business interests.
The Comptroller and Auditor General (CAG) said the government’s policy of giving away coal mines without an auction may have cost the exchequer Rs1.86 trillion. The mines were allotted when the prime minister was handling the ministry.
In an another report also placed in parliament on Friday, the CAG slammed the Civil Aviation Ministry for allowing the GMR-led group, which is building the Delhi’s Indira Gandhi International Airport, to charge development fee from passengers, saying it gave the private-sector group an additional benefit of more than Rs34 billion.
“It was noticed that Ministry of Civil Aviation and Airport Authority of India, on some occasions, violated the provisions of the transaction documents in the interest of the concessionaire,” the auditor said.
Tensions between mandarins in New Delhi and a hawkish central bank are also adding to the investor unease. While the finance ministry wants the Reserve Bank of India to cut interest rates and help spur investment and consumer spending, the central bank is not willing to play ball with inflation remaining already high.
Instead, the RBI has been urging the government to fix its finances such as the fiscal deficit which hit 5.9 per cent of GDP in 2011-12 and could well overshoot this year with the sharp slowdown in growth denting revenue collections.
“The task for the government is to generate supply so that we produce more and that will bring down inflationary pressures,” RBI Governor D.
Subbarao said in a speech at an event in Thiruvananthapuram in southern Kerala state. “The task for the RBI is to restrain demand.”
Many economists see merit in the central bank’s stance because inflationary pressures are mounting. Although provisional government figures showed wholesale price inflation at a 32-month low of 6.87 per cent in July, analysts said the data must be taken with a pinch of salt.
Food inflation stayed in double-digits in July and with scanty rains damaging crops there will be more upward pressure on food items in the coming months. Massive subsidies on fuel such as diesel and cooking gas also mask the real prices.
“As far as monetary policy is concerned, the central bank is unlikely to take much comfort from this transient fall in WPI inflation,” A Prasanna and Anurag Jha at ICICI Securities Primary Dealership wrote in note titled “The Great Indian Rope Trick”.
— The writer is a journalist based in India.
