Saturday, June 30, 2012

Indian economy, in recent times has been the subject of a lot of adverse news. Lowest GDP Growth of 5.3% in 9 yrs, persistently high inflation, fiscal deficit of 5.9% for 2011-12, rising Current Account deficit, falling rupee, rating downgrades, policy paralysis, corruption and the list is endless. The government choose to be in a state of denial for a long time blaming rising crude prices and the sovereign debt crisis in Europe for the state of affairs. Only recently has it been acknowledged that domestic factors have been responsible for the state of economy that have come to mar the regime of UPA – 2.

The government seems to have already made some measures to correct their past sins. Hike in petrol prices has been the first bold move by the government indicating clearly that it means business.

Lot has not been spoken about the recent clarification on General Anti-Avoidance Rules (GAAR) provisions that pumped adrenalin in the markets on Friday. GAAR Provisions introduced in the budget speech by Pranab Mukherjee on 16th March 12 ended up defeating the very purpose for which they were drafted. The objective was to mop up additional tax revenues by identifying some large scale fund diversions and to help in containing the fiscal deficit. The provisions created the fear of uncertainty in a market that was already beginning to become used to the new “Hindu Growth Rate”. There were valid reasons for Domestic investors (who had channelled their black money to the Indian market through PN Route) and FII,s to become sceptical of the moves of the govt. which had already unveiled a host of anti – investor policies and measures.

Investors investing in the Indian market through PN Route withdrew their monies to “safer” havens in the following weeks. The exodus was so huge that the total Investments through PN Route fell from over 18% of the total investment of Hedge Funds in India in Feb’12 to less than 10% in May’12. Total of over Rs. 100k crores was withdrawn from the Indian markets and another Rs. 50k crores that was expected to be pumped into the Indian markets found it’s safe haven elsewhere.

Huge capital outflows led to demand for dollar and severe fall in Indian rupee in the ensuing months. It touched an all-time low of 57.16 against the dollar falling over 15% since the day of budget speech. Fall in rupee led to widening of Current Account Deficit and Fiscal deficit which was already reeling under pain due to rising crude prices, govt. inaction and falling exports. The intent of GAAR provisions which was to check fiscal deficit ended up doing the opposite and fuelling inflation in the process.

The first major move by MMS on taking over the finance ministry has been the release of draft GAAR provisions which mention clearly that it will not be invoked on investments made through the PN Route. By reviving the investor sentiment and welcoming investments through PN Route, it intends to reverse the rupee momentum and contain fiscal and current account deficit which has become a thorn in the eyes of foreign investors. Hopefully, the mature hands of MMS will make few more smart moves to revive the sagging morale of Indian Inc. in the coming months.

3 comments:

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    2. Nitin agreed that the by clarifying on GAAR and Retro taxes of Foreign entities Government is intent on sending right signals to foreign investors across globe and willing to take steps to create conducive environment for inviting FDI's into this country. But we still need to address twin monsters of CAD and Fiscal deficit. These can only be addressed by encouraging more exports, raising FDI limits into various sectors (Post 1991 we had adopted more liberal outlook and raised FDI limits in most of sectors and put others under automatic route). We need matching efforts and consistency to send right signal to foreign investors.
      We need more stable FDI and long term investement rather than Hot money pouring in through backchannels i.e PN route and portfolio investment .These short term portfolio inflows have capability of destabilizing any government and economy. Yes these short term fund inflows can provide India temporary succor /relief in meeting its fulfilling short term obligation and avoid criticism/bad rating from credit rating agencies. But it's like delaying the inevitable and sooner than later the reality will catch us up and we will find ourselves in a precarious situation.
      We have not learnt lessons from subprime crisis of 2008 and still encouraging inflows through PN route, Hedge funds. This means we are still unsure of how to get the country back on track and hence these flip flop of announcement and later reversal of decisions. We were insulated from Subprime crisis not because of Government did anything to prevent it (although Greed to get more capital flows into the country by Government would have necessarily translated into Banks and various Financial institution taking much higher exposure on their books of Junk grade, highly risky C- grade securities) but because of RBI’s valiant efforts and absence of full account convertibility of rupee. Our leaders are resorting to witch hunting (i.e GAAR and Retro taxing of foreign entities).
      I stress this nation need better governance. Instead we are saddled with bunch of old timers, slithering and indecisive mavericks that are bent on lengthening our misery and predicament through Policy inaction, wrong data reporting and many flip flops. We are IT superpower,space technology superpower but still less attention is given to R&D initiatives.Services sector export contributes more to GDP rather than manufacturing sector.We can only get more FDI by creating right long term policies, and showing intent in implementing them on ground and not by blaming every Tom,Dick and Henry for our woes. We can only worry about what's in our control and not what's outside our control (i.e. European crisis, sub primes crisis). Hope the nation gets that animal instinct back as PM promised and it begins to roar again loudly. This time albiet minus any empty rhetoric and hollow promises.

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