Prime Minister Manmohan Singh recently took over the finance port-folio. One of his first announcements was to re-examine the recently proposed General Anti-Avoidance Rules (GAAR) tax provisions. This is one of those rare occasions where i agree with the PM.
I spent 11 years in international investment banking firms around the world. I didn`t become an expert, but i can say two things about foreign investors. One, they love growth. Two, they hate uncertainty. India attracted foreign investors for the first reason. Now, with our arrogant government`s policies such as the GAAR we have created the uncertainty, and given them a reason to hate us. No matter how wonderful the growth prospects, people just can`t part with their money in an uncertain, arbitrary environment. Hence, India is no longer a hot investment destination right now. Three top international rating agencies have downgraded India.
The unattractiveness of India to foreign investors is a matter of great concern. Our government`s finan-ces are in jeopardy, with little room to invest in the country`s infra-structure or job-creating industries. Private Indian capital is limited, and cannot provide as much growth as the country needs. It is obvious; we need foreign capital if we want to be a high-income growth nation.
And yet, the government managed to enact such a disaster as the GAAR. Under these provisions, tax inspectors have sweeping powers to question any transaction ever done by a company and label it as tax avoidance. The company has to prove itself innocent. As we know, any power in India is abused. One can only predict what will happen because of these provisions.
The fallout of these announcements was terrible, with every investor across the world receiving a warning about investing in India.
Things became so bad that our ever-silent PM, who does not believe in verbal communication as a human need, had to comment on how the new tax policies need to be re-examined. There is no need to sugarcoat it. The GAAR needs to be not just relooked at, or postponed for a year, or deliberated. It needs to be thrown out.
Perhaps there was a positive intent in it somewhere, but now the perception of these draconian rules is so bad, that nothing short of flushing them down the toilet will work. In fact, even scrapping the GAAR may not be enough. For now, investors have a sneaky suspicion that the Indian government is out to get us. If a hapless investor puts the money in our country, works hard and waits patiently for years, the government will come running to pluck the fruit right when it ripens. In fact, this is what happened in the Vodafone case. The Supreme Court had ruled in the investor`s favour. In most countries, that would have been enough. However, our much too clever government passed a retrospective law to void the Supreme Court judgment. The greed to collect some extra taxes was too much for the government to ignore the repercussions to investor sentiment. Such government tyranny hardly depicts India as a good place to do business. In fact, most investment advisers would only give one advice to investors — run.
So why did the government do it? It isn`t passing the necessary reform laws or doing much to open the economy. Why then pass these draconian measures that spooked even the most ardent India believers out?
Three main reasons come to mind. One, the most short-sighted one, is the government was falling short on tax collections. Actually, the collections were decent, but the government wanted to spend way more money. Hence, it thought of ways to milk wealth creators more. One of those bright suggestions was to kill the golden goose for dinner. Given how desperate the government was, they accepted it.
Two, the government in India thrives on hubris. It is used to passing unjust orders that common people in India are only too happy to accept. It has power over the police, never reforms the judicial system lest it gets efficient and controls all vital resources in the economy. In such an atmosphere, arrogance is bound to set in. Deep down, the government does not believe the foreign investors are helping us, should be treated with respect or be given fair rights. The government believes that like the common man, the foreign investors too are its subjects. The market system that the government keeps talking about is a market where there are free markets, but subject to government approval for everything. It`s like a party where the parents want to sit in the middle of the room. It wants markets to function under its feudal benevolence and surveillance. Sure, parents should ensure there are no drugs at a party and some regulation is required. However, the rules have to be clear, not hamper business and not be ad hoc. The GAAR and the Vodafone cases were the exact opposite.
This kind of it`s-market-but-my-market system, will fail. The government needs to back off, and promise through strict laws that it won`t be arbitrary ever again. Foreign investors, unlike Indian janata, do have an option to not invest in India. And they will run away if you don`t play fair. Plenty of countries actually woo foreign companies to invest in their country. It adds to the GDP and creates jobs. Investors need world-class business environments to invest. We need to do everything to ensure that happens. Lately, we have done the opposite.
Hence on this rare occasion, let us support our PM. The GAAR laws need to be thrown away for good. Another law, to protect the sanctity of markets and interests of participants, needs to be passed to reassure investors. India needs to not only have an open mind, but also be open for business.