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Apr 25, 2012, 02.26 PM | Source: Forbes India

Budget 2012-13 has lead to the regret economy

India's reputation takes a beating as the government plays ducks and drakes with policy

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Budget 2012-13 has lead to the regret economy

India's reputation takes a beating as the government plays ducks and drakes with policy

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Budget 2012-13 has lead to the regret economy
Dinesh Narayanan/ Forbes India

India's reputation takes a beating as the government plays ducks and drakes with policy

Rahul Dhir, the 45-year-old managing director and CEO of private oil producer Cairn India, is an exasperated man. In the six years that he has been running Cairn India, Dhir has battled bureaucratic red tape, unfriendly policies and systemic friction. But it still didn’t prepare him for Finance Minister Pranab Mukherjee’s Budget speech on March 16. The company is bracing for a total hit of about USD 2.5 billion if the minister’s plan to raise the cess on crude oil to Rs 4,500 per tonne goes through. By the end of that day, Cairn India had lost nearly a billion dollars in market capitalisation.

On March 22, Dhir wrote a stinging letter to Petroleum Minister Jaipal Reddy and Prime Minister Manmohan Singh saying that the move could affect his company’s future investments in India. He reminded them that Cairn India had earlier withdrawn - in good faith - international arbitration against the government on the issue of royalty and cess payments in return for letting Vedanta Resources buy a majority stake in the company. “These [fiscal viability of contracts and viability of marginal fields with additional cess] combined are a disincentive to further foreign investment in the E&P [exploration and production] sector…,” the letter warned.

“We are on pause now,’’ Dhir told Forbes India about the USD 6 billion of planned investment in the Rajasthan fields to double oil production to about 3,00,000 barrels a day.

No policy announcement in recent times has upset foreign investors and created a perception of arbitrariness as Budget 2012-13. While the UPA-II government had become infamous for its inertia, nobody had expected it to reach into the past to fill its coffers. That is what the finance minister did with retrospective amendments to tax laws, making a recent Supreme Court verdict against the taxman’s demand of USD 2.2 billion on British telecom company Vodafone ineffective, and raising fears of diluting the authority of even the land’s final word of justice.

“India will lose significant ground as a destination for international investment if it fails to align itself with policy and practice around the world and restore confidence in the relevance of the judiciary,’’ a group of seven trade bodies, including Confederation of British Industry, Japan Foreign Trade Council Inc and United States Council for International Business, that together represent about 2.5 lakh companies, wrote to Manmohan Singh on March 29.

Justifying the amendments, the finance minister said, “India is not a no-tax country; it has a determined tax rate. Our country is not and cannot be a tax haven.’’ But that is not even anybody’s case.

“Nobody questions the right of the state to tax income, but the retrospective levy combined with a spate of other recent developments have created a groundswell of uncertainty,’’ says Percy Billimoria, senior partner at corporate law firm AZB and Partners. Billimoria says that there appears to be a sense of invincibility about the economy among policy makers but investors are not going to commit capital and move high tech manufacturing to India unless there is stability in tax and economic policies and simplicity in the regulatory framework.

“This sends chilling signals,’’ says Ron Somers of US-India Business Council. Somers says that industry is okay with paying up if the government wants to tax a transaction. But it should be prospective, not retrospective. He says India cannot afford to send conflicting signals when it is looking at USD 1 trillion investment in infrastructure. “You don’t change the rules in the middle of the game.’’

The finance minister’s move has further clouded the atmosphere of uncertainty and also put a question mark on the reliability of legal recourse. 

“The amendments have diluted the authority of the Supreme Court,’’ says senior lawyer Harish Salve, who fought for Vodafone against the income tax department in Supreme Court. “I am telling my clients that the only way to do business in India is the Indian way.’’

What Salve is hinting at is negotiating the Indian bureaucracy and government with favours and lobbying rather than believing in the sanctity of contracts and rules, a method that many successful Indian companies are known to use effectively to mould government policies and procedures. In fact, that was the norm during the Licence Raj of the 70s and 80s. Big businessmen arguably spent most of their time cultivating politicians and bureaucrats, creating an oligarchic set-up with scant respect for rules and process.

That began to change in 1991, after Manmohan Singh, then finance minister, opened up the country to foreign capital and competition. Over the years, India gained in reputation as a country where democracy was deep-rooted and law was respected. Justice may be delayed, but not derailed. Promises enshrined in contracts and agreements would be met. The courts ensured that.

“An independent judiciary is not an ally of the government,’’ says Gopal Subramanium, senior lawyer and former Solicitor General of India. “Judgements of a court are not meant to go the government’s way.’’

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