|Desperately seeking a leader|
|Thursday, 05 April 2012 00:00|
The economy is in serious crisis, and all we’re doing is scoring debating points with George Osborne
While the coal minister issues presidential directives to bring Coal India to heel and the finance minister scores debating points with George Osborne, his British counterpart (c’mon, you had retrospective amendments too!), you have to wonder if there’s anyone out there who has a grip on where India is headed, or at least someone ensuring that all government actions are headed in the same direction. Since this is not a BJP government, it’s too much to hope that Lord Rama will be looking over India’s safety.
The government is bound by coalition partners and so cannot do too much by way of reforms like, say, those in the financial sector — even if you don’t agree, it is possible to sympathise with the argument. The government can’t cut back on subsidies until there is firm evidence that economic growth in itself is enough to help everyone — there is conclusive proof from NSS data that shows that supposedly marginalised socio-economic groups, from STs to Muslims, have done better in the higher-growth period of 2004-05 to 2009-10, but let’s take the government’s word on this. After all, if Sonia Gandhi’s essential DNA (the European crisis suggests the welfare state is even more ingrained there than it is here) is suspicious of free markets, it is too much to expect the Congress to jettison it. In any case, it’s not as if the BJP, forever the Congress’s B-team in the post-Vajpayee era, has views that are any different. Despite being a party whose ideology is free markets and minimum government intervention, the BJP doesn’t speak up against subsidies, but makes what it thinks is a nuanced argument against “wasteful subsidies”, as if there are any other types.
What this means, then, at a macro-economic level, is that India’s savings rates aren’t going to come back in a hurry — from 36.8 per cent of GDP in 2007-08, they fell to 31.6 per cent in 2011-12, and primarily because of the sharp fall in public sector savings, from 5 per cent in 2007-08 to 1.7 per cent in 2010-11 (2011-12 numbers are likely to be lower). The losses the oil PSUs have to sustain add up to around 1 per cent of GDP, for instance. So, unless this is fixed, savings can’t rise and without that, say goodbye to the 8 per cent growth of the past. As for 9 per cent, good Afghan poppy is the only solution.
At a time like this, getting investors in — both Indian and foreign — has to be the top-most priority, though without savings rising, there is a limit to how much investment can rise.
Yet, over the past year or more, the government has systematically gone after so many large projects it isn’t funny, ranging from Cairn-Vedanta to Qualcomm to Antrix-Devas, UTI-TRowePrice, and so many more — in the case of telcos who paid Rs 68,000 crore for 3G spectrum, after having said in writing that intra-circle roaming (Airtel’s subscribers in Delhi can use Vodafone’s 3G network in Delhi, for instance) was allowed, the government is in the process of levying fines for this. If the 2G scam finally looked like it had been laid to rest with the Supreme Court cancelling 122 licences, the government wants to now ask the Supreme Court if, going by the same logic of auctions-are-best, the government should also cancel licences issued between 2003 and 2008. Montek Singh Ahluwalia has pointed out that this is just creating a crisis for the sake of it, since the Supreme Court has not asked the government to cancel the licences issued between 2003 and 2008, but he seems to be fighting a losing battle with the likes of Kapil Sibal.
If this wasn’t bad enough, you have the retrospective tax amendments of the budget. To justify this, the finance ministry has been trotting out all manner of examples of other countries doing it. China was one example till Ajay Bahl of the law firm AZB pointed out that the Chinese retrospective tax amendments cited were about as authentic as the Sino-Ludhiana cuisine that passes for Chinese food in India. In January 2008, the Chinese brought in a law that said offshore transactions (of the Vodafone type) that involved Chinese assets would be taxed in China. In December 2009, a circular was issued to say that the January 2008 law needed to be complied with. With the law in place from January 2008, needless to say no investor felt ambushed, as has happened in the case of India, with the amendment going all the way back to 1962.
With China no longer available, the finance ministry is now citing UK examples. Even if you assume the UK did do retrospective amendments, and experts argue the example is as specious as the Chinese one, how does it matter? India needs investments; the UK may have thought it was doing well enough. In any case, let’s keep in mind that, in 2011-12, India gave tax exemptions of Rs 5,29,432 crore (that’s around half the total tax collections) for, among other things, encouraging firms to invest more. So it’s not as if, as is made out, India’s tax laws are uniform and tax all transactions routinely.
What makes this all the more curious is how the finance minister has said investments through P-Notes will not be taxed. The government has the right to tax FIIs, but if FIIs are to be taxed, why say the P-Note portion of FII inflows will not be taxed? It doesn’t have anything to do, does it, with the popular belief that P-Notes stand for Politicians-Notes?
The dust hasn’t even settled on the budget, and the PMO/coal ministry go and mess up on Coal India by forcing the PSU to commit to selling coal to power producers, even though it has no hope of producing it. Given how Coal India’s production has fallen compared to even the thrice-lowered target, its directors were against this, so a presidential directive has been issued to it. As to what it does to the case being fought by The Children’s Investment (TCI) fund of the UK, the coal minister has said that, in a poor and socialist country like ours, TCI should have known no PSU can be run on purely commercial lines! Since this probably applies to oil PSUs like ONGC, which lose a lakh crore rupees each year because of subsidies, why not just delist the PSUs? Otherwise hapless investors buy into them in the belief they will be run along — oh my god! — commercial lines.
Every possible indicator you can think of is screaming red — the fiscal deficit and the current account deficit are back to where they were just before the 1991 crisis when India had to sell its gold and, as Crisil has pointed out, corporate default rates have touched a decadal high. There are mitigating factors such as higher forex reserves and higher GDP growth, but no crisis repeats itself in exactly the same manner as the last time.
Can someone, anyone, take charge, or are we going to be on auto-destruct till the next election?
The writer is opinion editor, ‘The Financial Express’