Great potential in India long-term growth story

July 7, 2012

(Rajan Ghotgalkar is Managing Director of Principal Pnb Asset Management Company. The views expressed in this column are his own and do not represent those of either Principal Pnb or Reuters)

Reforms seem to be the flavour of the season after we relished and put aside the corruption issue.

“What do you mean by reforms, getting more money into stock markets? Where would you place ‘financial inclusion’ for example, in your reforms priority?” retorted someone closer to real issues when questioned if India will now see faster reforms.

Notwithstanding the political dividends scavenged through such speculation, it is difficult to believe that one man was holding back the entire reform process.

However, the couple of billions which may come in from FDI for insurance, banks, single or multi-brand really do not matter. Because headlines and sentiment rarely impact hardnosed business cases.

India now demands a change in its eco-political mindset and not merely a few permits added and a couple of licences relaxed.

One cannot help envy the United States for being able to force through the Foreign Account Tax Compliance Act (FATCA) without even respecting sovereign jurisdictions let alone their own business interests. Even countries such as Japan or Switzerland lapped it up without as much of a whimper.

Better still, the others maintain an embarrassing stony silence by saying that it is a matter for their private sector to deal with.

India, on the other hand, once again took the soft route of yielding to demands for retaining status quo on participatory notes whilst no amount of criticism seems enough when it comes to GAAR and its negative impact on FDI. What is perhaps the foremost reform is to impart a sense of stability to anyone involved in business.

India is not alone to have enacted a GAAR legislation. However, it’s the possibility of being subjected to coercive action and the discretion to reopen assessments, thereby leaving tax contingencies open, which gets everyone nervous. This really is a credibility and not a regulatory reform issue.

Given that we will for a long time remain at the mercy of the oil price cycles and also remain net importers, our current account deficit should be expected to stay challenging too.

Therefore, it should be reasonable to expect that we should ensure a stable tax and interest rate scenario for NRIs; especially when they have consistently repatriated funds at a rate even greater than the Chinese. Instead, no sooner than a respectable currency surplus is built, we can’t wait to get back at them by quickly bringing down interest rates to sub-Libor levels. Of course, FII money continues to be encouraged even when the dubious nature of participatory notes has long been acknowledged.

The bogey of taxing interest in NRE and FCNR accounts keeps coming back every other budget. The rules to determine NROR were changed without concern for old arrangements made by returning NRIs.

Retrospective amendments cannot be justified even if other counties have done so in the past.

Indian industry finds it more convenient to import inputs than buy locally and a lot of economic activity enabling infrastructure is required to change this. Foremost, investors in infrastructure projects have to feel that their money is secure and will make a reasonable profit as envisaged when the investment was made.

Not surprisingly, profit is not a bad word in the developed world.

We cannot have licences revoked or held in abeyance after the money is invested. Sensitivities around land acquisition and environment once addressed cannot be reopened.

Investors need to feel reassured that even successive governments will display the political courage to stand by commitments made by predecessors and that the judicial system will protect their rights without delay.

The abandoned Tata Singur factory should be preserved forever as a monument to remind us of the end result of populism.

FDI in retail, another popular ask, may not yield too much either; if one was to go by our experience in single-brand retail.

After all, is it unreasonable for, say, an IKEA to ask for time to develop local manufacturers who can live up to their quality standards? Also, why should their suppliers stay below $1 mln; don’t we want them to grow into big businesses?

Anyway, FDI in multi-brand retail will do no good unless we free up our supply chains by doing away with restrictive agri-marketing laws and barriers in inter-state goods movement through GST.

While we may be helpless when it comes to oil imports, we can certainly limit gold imports by protecting individual savings through genuine inflation-linked bonds and only taxing real interest using the existing indexation framework.

China today manufactures all conventional arms domestically. What prevents us from doing the same?

Indeed, where would we place “financial inclusion” for example, in the reforms priority? This is key in ensuring that the benefit of subsidies reaches only the deserving.

Reforms may therefore have little to do with opening up our trade borders indiscriminately in return for trickling foreign currency inflows and lots of positive sentiment leading to stock markets frothing up higher.

The solution to India’s challenges may be found more within and in re-engineering our mindsets and policy administering processes.

India is a consumption economy and if we can genuinely liberate ourselves from economic and political bigotry we may have to worry lesser about the euro zone credit shocks and fickle FII portfolio inflows when we regain a 9 pct growth rate.

There’s much to be done and therefore great potential in the India long-term growth story. The glass is certainly half-full.

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