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Mar 18, 2013, 06.34 PM IST | Source: CNBC-TV18

Budget 2013: Is Chidambaram's tax googly beneficial to foreign investors

Although, market expectations were quite high, the Finance Minister failed to deliver and presented an average budget which did not excite investors much. In a panel discussion with CNBC-TV18, Art Woo, Director – Asia, Sovereign Ratings, Fitch Ratings believes P Chidambaram’s assessment of the fiscal deficit is modestly encouraging.

Although, market expectations were quite high, the Finance Minister failed to deliver and presented an average budget which did not excite investors much. In a panel discussion with CNBC-TV18, Art Woo, Director Asia, Sovereign Ratings, Fitch Ratings believes P Chidambaram's assessment of the fiscal deficit is modestly encouraging.

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Rahul Bhasin, Managing Partner at Baring Private Equity on the other hand, feels the revenue estimates, at best can be considered hopeful. Looking at the precarious economic condition and a high current account deficit, he thinks a lot of issues remained unaddressed during the Budget session.

Sanjay Nayar, Member & Head of KKR India however, is slightly positive about the Union Budget 2013. He explained, "This is a reasonably realistic attempt to curb expenditure in an otherwise difficult year, even going forward. To that extent, it is pretty positive. The other positive thing here is that the Finance Minister has tried small measures in getting the savings and investments going."

As far as the foreign investor's perspective is concerned, Ron Somers, President of USIBC is quite bullish on the Budget. According to him, the Finance Minister has taken a positive step forward in terms of foreign direct investment (FDI) and the economic openings under his leadership have also been quite encouraging. "We are also going to see the fisc balanced in a very nice way, with an imperative as well in acceleration of divestment of some of the public sector assets of the country and that’s going to drive efficiency and productivity. So, I am quite bullish on this Budget," he opined.

There is also some confusion regarding circular 789, tax residency certificate (TRC) beneficial ownership and Mukesh Butani, Chairman of BMR Advisors said it is better to wait for the clarification from the Finance Minister instead of guessing its implications.

Here is the edited transcript of the interview on CNBC-TV18.

Q: There has been this Sword of Damocles hanging over the government’s head. Will the government face a ratings downgrade, will the rating agencies move or not on the basis of what you have heard from the government today in terms of the fiscal deficit number? They have estimated it to be 5.2 percent for this year, talking about 4.8 percent and being able to deliver on that for FY14, do you believe in those numbers? In the light of that how would you view this Budget?

Woo: It is modestly encouraging development. They have tried to stick with their fiscal consolidation target they had set out last year. So, it is an encouraging development.

Q: Does the Budget make any difference to foreign investors? They made a sales pitch to foreign investors and are you buying it or not buying it, what is the deal?

Bhasin: There are several larger issues which have been unaddressed. To start with, on the foreign currency side, the rupee has depreciated considerably but we have also had a scenario since 2008 to now where foreign debt has gone up from USD 225 billion to USD 380 billion.

We are dependent with the over 5 percent current account deficit on foreign investment flows, a lot of which has been a result of monetization which is ongoing across the anglo-saxon world. So, we are in a very precarious condition. Europe still has got great threat of de-leveraging and possibly an inherent banking crisis somewhere in its mix. It is still pending, even though the US is looking up today.

In this macro economic environment globally and looking at how vulnerable we are, I would have expected the government to be far tighter as far as the expenditure side was concerned. In this environment, given the fact that our current growth trajectory being what it is, the revenue estimates have got to be at best hopeful.

Q: Would you describe Budget as a non-event as well?

Nayar: I am going to be a little more positive than Rahul on this. The more eventful part is that it is a real reasonable crack at getting something done, unlike last time when these numbers were pie in the sky and we were falling short. This is a reasonably realistic attempt to curb expenditure in an otherwise difficult year even going forward. To that extent, it is pretty positive. 

The other positive thing here is that the Finance Minister has tried small measures in getting the savings and investments going. We can talk about the details later but, that is pretty positive as you read the text because we were falling on both investment rate as well as savings rate, which has been the backbone of the local economy.

The final thing is that as we have been saying for quite some time, it finally boils down to all the stakeholders of the table around the Finance Minister and the Prime Minister delivering upon the promise. That is getting things done so that the private sector sentiment is back to make investment. That is the key here which the Budget statement can’t lay out. But, I hope that is what the follow through is.

Q: How have you read this Budget? The last one was presented by Pranab Mukherjee and foreign investors went to town writing letters to everybody saying it was a disaster. It was bad for foreign investors, bad for India and foreign flows into India. Do you feel better about the India story and about foreign investors willing to put money into India post this?

Somers: No matter how you look at this Budget, you have to read it as positive for foreign direct investment. Explicitly, the minister himself has said that foreign direct investment is an imperative. That’s what the United States-India Business Council (USIBC) is all about.

The economic openings that have occurred under this Finance Minister have already been quite encouraging and we are also going to see the fisc balanced in a very nice way, with an imperative as well in acceleration of divestment of some of the public sector assets of the country and that’s going to drive efficiency and productivity. So, I am quite bullish on this Budget.

This is a seasoned Finance Minister. He is one of the original architects of India’s economic liberalisation and so the USIBC is positive net net.

Q: There seems to be once again a disconnect between what the government is saying and what the fineprint actually reads and I am bringing back this issue of circular 789, tax residency certificate (TRC) beneficial ownership and we saw this happen last year. The view coming in from the Finance Ministry’s team is that there has been confusion or error in drafting. Are we likely to see a clarification on that front? We saw what happen to the markets on the back of that fear, are they going to go up to the Mauritius route or not, what is your own sense on this?

Butani: I am sensitive to the fact that this whole principle of necessary but, not sufficient is a tricky one. I think before I express a view on your channel, we should wait for the Finance Minister’s clarification. But, I can read into what he was planning to do. Last year this principle was enshrined in the statement of objects but it was not there in bare act.

What he has done is he has picked it up from the statement of objects and put it in the bare act and he has done it retrospectively. He is saying this is what the law intended from last year. So, let us wait for the clarification.

 

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