Delayed FDI approvals, flip-flops about Mauritius and run-ins with the taxman may leave foreign investors confused.
Not to let the left hand know what the right hand is doing may be a good policy in espionage. But why is the Indian Government following this principle? Consider the garbled signals that it is sending out to foreign investors. On Friday, galvanised into action by the sliding rupee, the Finance Minister was going all out to woo foreign investors, promising to review or even wholly do away with existing Foreign Direct Investment (FDI) limits in various sectors. The very next day, you find the Foreign Investment Promotion Board (FIPB) putting the Jet-Etihad deal, one of the very few large FDI deals that has actually fructified this year, on hold, without citing concrete reasons. The reported reasons for this range from the FIPB requiring more details about ownership and effective control of Etihad, to doubts about whether Jet Airways’ promoter Naresh Goyal’s stake will count as FDI (as he is an NRI). While it is quite right for the FIPB to demand transparency on the entities infusing money into India, why should calculation of FDI limits be subject to any confusion, after so many years of liberalisation?
Even if one attributes these hurdles to Jet Airways’ opaque ownership, one can’t forget the number of hoops that AirAsia’s FDI proposal has had to jump through. It announced its venture with the Tatas in February and obtained FIPB clearance in early April; but that wasn’t the end of the story. First the deal ran into roadblocks from the Civil Aviation Ministry which questioned if the new policy was meant only for older airlines. Then, there were issues about whether the new airline’s directors would be Indian or foreign nationals and the Home Ministry’s clearance. Once done, the deal will once again be lobbed back to the Civil Aviation Ministry.
WELCOME MOVE, OR NOT?
As a result of all this red tape, the airline, which had originally proposed to start operations in September, may now do so only next year. In the meantime, domestic passenger fares will continue to skyrocket, as Kingfisher’s exit sharply curtails available seats.
If policymakers seem to be in two minds about the desirability of FDI in airlines, they have been equally undecided about other forms of foreign investment too. In his Budget speech, the Finance Minister drew whoops of delight from foreign investors when he stated that India did not have a choice between “welcoming or spurning” foreign investment at this juncture. Yet his Government has spent much of the subsequent three months clarifying fine print on tax residency certificates and retrospective taxation of foreign deals.
Every few weeks, there is a new bogey in the market about the Government investigating foreign investments routed through Mauritius. FIIs respond with big share sales, markets tank and policymakers step in to make soothing noises. But there is little clarity about whether we actually welcome or spurn the 40 per cent of India’s foreign investments that today come in via Mauritius.
TAX TROUBLES
Then, there is the ongoing fracas where tax authorities have slapped several MNCs with huge tax demands, for infractions on share valuation or the under-pricing of products sold to their overseas arms. A recent Business Line story notes that Rs 70,000 crore worth of transactions are stuck in such wrangling. One is not suggesting that India should allow foreign investors to flout laws or evade taxes they are required to pay. But with the rupee heading down a slippery slope, imports not abating, and the current account deficit at a record level, it is imperative to fix India’s policy priorities at this juncture.
Do we want to encourage capital flows to immediately plug the trade deficit and defend the rupee? If so, it is best to lay down the welcome mat for foreign capital, without asking too many questions at this juncture about its origins. Efforts to bring such flows into the tax net can wait for a day when the Indian economy is stronger.
Or are we keen to show the world that India is dead serious about encouraging only the right kind of foreign investors? In that case, we must be prepared for a substantial churn in foreign investments in India.
Whatever we do, we certainly cannot have it both ways. Foreign investors need to know if India loves them or not.
No comments:
Post a Comment