There has been overwhelming condemnation of the finance minister’s move. “We are concerned about the proposed Budget measure,’’ British Finance Minister George Osborne said after meeting his Indian counterpart on April 2 in Delhi. “Not just because of its impact on one company, Vodafone, but because we think it might damage the overall climate for investment in India,’’ Osborne warned.
What Mukherjee refuses to acknowledge is that investors are not worried about paying tax. They are worried about not having a stable regime that upsets their plans mid-flight.
“The Indian dream is on ventilator,’’ says CB Bhattacharya, dean of international relations and E.ON Chair in Corporate Responsibility at ESMT European School of Management and Technology, Germany. “The government is doing little to allay foreign investors’ fears.’’ The fears are at multiple levels of policy, market place and labour market. Bhattacharya says investors in India could not be sure of meeting deadlines as there is no assurance of uninterrupted labour, goods and materials supplies. “They want returns within a certain period of time and there is no surety on that,’’ he says.
Short Term, Long Term India desperately needs capital to build roads, ports, power plants and railways and create jobs and livelihood for millions entering the labour force. India is one of the youngest countries in the world with a youth bulge that could become a liability instead of opportunity if the right economic policies to attract capital are not in place, both in the short term as well as the long.
“India will remain a victim of international liquidity,’’ says a Singapore-based manager of a fund that has over USD 3 billion invested in the country. As nations compete for foreign capital, India could find itself in a difficult situation.
In the short term, foreign capital is essential because of the country’s trade imbalance. In the last three months of 2011, India’s current account deficit widened to 4.3%, nearly doubling from the previous year’s level. During the third quarter of 2011-12, India’s balance of payments experienced a significant stress as the current account deficit widened and capital inflows fell far short of financing requirements, resulting in significant drawdown of foreign exchange reserves, the RBI said in its review of balance of payments recently. The foreign exchange reserves were eroded by nearly USD 13 billion, or as much as was added to the reserves in the previous year by net capital flows. India ended 2011 with forex reserves at USD 296 billion, enough to cover eight months of imports.
Foreign direct investment is expected to come down because of policy uncertainty and increasing political risk while portfolio investments depend on international markets and sentiments which add to its fickle nature.
While India has almost always run a current account deficit, save for a brief period between 2001 and 2004, the country’s money managers had assumed that foreign flows could fund a deficit of up to 2%. If services exports, instrumental in keeping the current account deficit within bounds, suffer in the coming months and capital flows continue to decline, the balance of payments situation could become grave. Tightening foreign exchange liquidity could force the central bank to become even more conservative with forex spending. The 1991 balance of payments crisis is still vivid in the institutional memory of the nation. The man who confronted that reality is the prime minister today but a rather ineffective one. Even his word does not carry much weight.
Within days of his reassuring the Korean government of POSCO’s investment in Orissa, the National Green Tribunal ruled that the company will have to reapply for environmental clearance. Nothing came of Manmohan Singh’s assurances to German Chancellor Angela Merkel on a proposed railway coach factory at Madhepura in Bihar for which Siemens was keen to bid. In July 2011, the German Charge d’Affaires Christian-Matthias Schlaga wrote to the PMO seeking its intervention. The Germans wanted India to move ahead with the bidding process as Siemens risked funds tied up for the tender going unutilised. But the Railway Board did not even show the courtesy of replying to letters and reminders from the PMO on the project.