Chidambaram has done a lot, and has a lot to do
After RBI Governor D Subbarao contributed to the falling rupee on Tuesday by saying he thought this was the wrong time for a sovereign bond and that India didn’t need to go to the IMF for a line of credit, finance minister P Chidambaram did well to say the government has plans to get PSUs to raise funds abroad as well as to target NRIs and various sovereign wealth funds (SWF) to bolster India’s forex reserves. The Jet-Etihad deal, for instance, could help attract UAE’s $627 billion SWF. The FM’s projections that India can get $80 billion of FDI/FII in FY14 look optimistic given India has never attracted such investments in even its best years—between April and July, FIIs who are expected to contribute a large part of this actually withdrew $3.4 billion. But how investors will behave depends on a lot of things. If the government is able to, as is expected, get Parliament to pass the Bill to hike FDI limits in insurance soon, this will trigger fund inflows. Similarly, if the Cabinet clears the new guidelines on FDI in multi-brand retail—guidelines that finally make it possible for firms to come in, 7 months after Parliament cleared FDI in retail—the FDI picture could look quite different.
As Chidambaram completes a year back in his old office, the list of changes catalysed by him are impressive. Top of the list, of course, is the FY13 fiscal deficit which, against the 6.2% of GDP estimates by analysts, ended up at a mere 4.9%. The policy paralysis that held up R7.5 lakh crore has been chipped away at and R1.6 lakh crore worth of projects have been cleared by the Cabinet Committee on Investments (CCI). It is true CCI is not as powerful as Chidambaram had envisaged and, in cases like Cairn and RIL-BP, the companies have offered to return oil/gas blocks as two thirds of their areas were still inaccessible to them even after the “clearance”. But investors can see the progress in lowering diesel subsidies, the progress on debottlenecking, the move towards goods & services tax, and the moving closer to market prices for natural gas which could attract billions of dollars of investment.
After years of inaction, the incomplete agenda always looks larger and the fact that the government is unable to get, for instance, Coal India’s unions to allow a 10% stake sale shows weak resolve. The advantage here is that, with the R15,000-18,000 crore Balco/HZL residual stake sale as well as the SUUTI shareholding worth R49,000 crore, the government does have several fallback options to raise funds. In areas like telecom, merely raising FDI caps won’t do the trick till government policy gets less hostile—the government has gone back on its assurances on 3G roaming and has levied penalties of a whopping R63,000 crore on all players, though the issue of base prices for 2G auctions may finally get resolved after a year’s delay. While removing the taxman in charge of the 58% hike in transfer pricing adjustments on multinationals operating in India was a good sign, there is no clarity on what happens to the R70,000 crore of orders issued in FY13. In quite the same manner, no matter how much the FM may talk of a non-adversarial relationship, the fact that the Vodafone retrospective tax amendment wasn’t rolled back does cause discomfort to investors—indeed, Vodafone’s big challenge right now is that if it accepts the government’s offer to conciliate under Indian rules, will it have compromised its rights under the bilateral treaty? There is no quick fix as the FM has said. The question is whether investors are willing to afford him the luxury of time.