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Don’t Chase Out FDI From India

The euphoria and disappointments of Union Budget 2012-13 have now settled down. This paves way for some rational thinking on the way forward—or at least for the next 24 months of this governme

Published: 19th March 2012 03:54 AM  |   Last Updated: 16th May 2012 06:38 PM   |  A+A-

The euphoria and disappointments of Union Budget 2012-13 have now settled down. This paves way for some rational thinking on the way forward—or at least for the next 24 months of this government’s tenure. With a government that has been simultaneously battling a fiscal, governance and credibility deficit, one’s expectations have to be realistic. Rightly so, the Finance Minister (FM) has politically and economically opted for a ‘play safe’ budget. To his credit, the FM has not given elbow room for fractious allies to fly off the handle, nor has he panicked too early by pushing a populist budget as had been speculated earlier.

Much of the budget has already been discussed threadbare. Focus now needs to shift on two key variables—GDP growth for FY 2013 and the fiscal deficit. While globally, most countries have scaled down their growth forecasts, including China, India optimistically believes it can perform better than it did in FY 2012. A 7.6 per cent GDP growth is clearly doable—provided the government alters its ‘muddle-your-way-through’ stance that appears to have become its hallmark. Decisions have to be taken swiftly. The government cannot get into action mode only when crises reach levels where industries become near basket cases. India’s growth potential should not be taken for granted.

Growth needs a conducive investment climate and India’s growth needs foreign investment. So far, foreign investors have been forgiving to India despite reforms being stalled. For example, Foreign Direct Investment (FDI) limits in insurance has been stuck at 26 per cent for over a decade, yet foreign partners have continued to support the sector. FDI in retail may have raised political heckles, but leading foreign retailers have found it worthwhile entering the market through the cash and carry route, possibly with the hope that the Indian market would eventually open up. Despite the 2G debacle, many foreign telecom providers have expressed their interest in participating in the new spectrum auctions.  

The Union Budget’s proposal to make retrospective amendments to tax off shore share transfers of foreign companies involving Indian assets and/or control in an Indian company is totally regressive. No one is disputing the intention to tax such transactions, but such amendments should be prospectively done.  

Investors want clarity on the tax environment when they invest. Admittedly, in a complex legal and tax web, there are often grey areas which may be subject to discretion. However, a retrospective amendment in the light of the recent Vodafone case is first an offence to the Supreme Court ruling and secondly it sends a wrong message to international investors that settled tax cases can be reopened. One hopes common sense will prevail and necessary amendments will be made, otherwise India’s credibility internationally will take a severe beating —something it can ill afford at this juncture. Fortunately, the onus to rectify this does not lie in the hands of any fractious allies. If this is not rectified, the ‘I’ in BRIC countries may well be dropped. Indonesia stands ready to substitute or another acronym may spring up, bypassing India completely. I am hopeful that the Finance Minister will not let this happen.

Parekh is Chairman, HDFC Limited



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