Drop GAAR, indicates BoP PDF Print E-mail
Saturday, 30 June 2012 00:00
AddThis Social Bookmark Button


BoP worsens, making wooing FII/FDI critical

The confusion over GAAR guidelines couldn’t have come at a worse time. RBI’s balance of payments data, which show a steady worsening (at 4.5% of GDP, Q4 current account deficit is worse than Q3’s 4.3%), make it clear India desperately needs to attract forex flows—in such a situation, whether it is morally right to tax FIIs may not be as important as it is to attract them. At least for now. Some numbers will help clarify the picture. While FII investments were a high $8.8 billion in equity and $4 billion in debt in Q4 FY12, in the April to June period (till date) they were minus $1 billion and $2 billion, respectively. Apart from the slowing of the Indian economy, the real change that FIIs reacted to was the budget which brought in the retrospective Vodafone taxation and the GAAR.

Juxtapose this with India’s forex needs in FY13, and the implications of GAAR become clear. As compared to the FY12 current account deficit of $78 billion, analysts expect the FY13 CAD to be in the region of $65-70 billion, largely due to the fall in oil prices. Where does this CAD get financed from? If you assume FDI inflows for FY13 at $22 billion, the same as FY12, that leaves around $45 billion uncovered—the FDI target looks ambitious given the lack of reforms, but let that be. The rest will have to come from FII and banking capital like NRI deposits—higher interest rates will help the latter, but increased FII flows are vital. What makes things worse (http://goo.gl/echmV) is that, with investors turning risk-averse—as evidenced by crude prices falling—FII and other such inflows tend to remain low. But try explaining larger strategic objectives to the taxman.


You are here  : Home Economy Drop GAAR, indicates BoP