India on a Roll?

On Monday (7th May), India’s Finance Minister tried to undo the damage that his budget, presented in early March, had caused on investor sentiment towards India. More specifically, retrospective amendments to Indian tax laws and the implementation of General Anti-Avoidance Rules (GAAR) sowed confusion and led to heartburn. It was not so much that the GAAR was an odd regulatory intervention by India- there is international precedence -but, the timing was a matter of poor judgement. India depends on foreign fund flows, given the current account deficit. There was no semblance of consultation, preparation time, etc. Even granting the desperate nature of these amendments given India’s high fiscal deficit, the introduction of the moves failed to take cognizance of the damage it would cause to growth through the exit of foreign investment. The growth impact would lead to less tax revenues, nullifying the intent of the law. It was a combination of hubris and ignorance. This blog post from Reuters captures it rather well.

As for what the Indian Finance Minister did, he postponed the implementation of GAAR by a year. But, some details are fuzzy. The postponement might apply only to those deals structured in jurisdictions with which India has a double-taxation avoidance treaty. The onus of submitting proof that tax avoidance was the objective rests with the taxman rather than with the defendant. There is now provision for an independent private sector participant in the proposed GAAR panel. The rate of capital gains tax on private equity investments has been halved. For those interested in details, the Reuter Factbox is rather useful.

In addition, the government announced that angel investments above par value would not be deemed as ‘Other income’ in the hands of start-up companies. The levy of import duty on gold imports has been withdrawn.

While these are doubtlessly welcome, the larger question of the quality of the process of policy-making in India remains unanswered. Hence, the damage done to sentiment on India remains. Some of the criticism India has attracted is, no doubt, motivated and unfair. But, India is hurting. The rupee remains under pressure, even though it is cheap on many counts. The stock market is not cheap yet. With global risk appetite taking a justifiable turn for the worse, it is hard to see the rupee recovering quickly, even if central bank actions put a floor under the currency.

India’s domestic car sales plunged in April, dropping 26.8% (m/m) from March. Local passenger car sales dropped to 168,351 vehicles from 229,866 in March. The series is volatile and it is not seasonally adjusted. The volatile Industrial Production data again bared its teeth. In March, the overall index of industrial production contracted 3.5% on an annual basis. But, on a month-to-month basis, the sub-index for capital goods production jumped 18%.

But, it appears either that Indian bureaucrats cannot wait to get back to the command and control economy or that they have embraced a death wish for the country. Regardless of whether this news-article is exaggerated or not, the fact that the Competition Commission is seeking powers to conduct ‘search and seizure’ raids and that it is questioning the selective distribution of Apple IPhone products in India leave one speechless.

Not that we had much hopes for the Government of India to make symbolic moves on foreign investment. But, it has decided to suspend attempts to open up the insurance sector. Reform – genuine, needed or symbolic or superficial  – has become a dirty word in the Indian political lexicon again. This is genuinely an achievement of the UPA government. The people who spoke at the recent launch of a book (festschrift) to honour Dr. Manmohan Singh on his legacy of reforms really could not get around to say that their emperor had no clothes all along – actually from 1991 itself.

If someone like Tyler Cowen is genuinely worried about India, So should we.

3 Responses to "India on a Roll?"

  1. Benoy   May 14, 2012 at 10:00 pm

    He didn't have clothes ever. The credit for reforms is due to the then PM, Narasimha Rao. Manmohan was not capable of decisions then as now..
    The bureaucrats and politicians aims have reverted to form – it is to increase the size of the pie for themselves while spouting noble sounding stuff. Who cares about the country. We will go back to the 3% growth rate of the Indira regime.

  2. Amar   May 19, 2012 at 6:08 am

    Growth story intact, fears unfounded

    An irrational fear seems to be taking over equity markets and investor sentiments. But then again, if we take a closer, more detailed look at some real data, it shows that a healthy recovery is under way and the fears are unfounded.

    The analysis shows how key indicators like PMI, inflation, FII investments, Nifty Trends and corporate profitability all point to a healthy recovery process being underway.

    And since the process of recovery is still underway, it is expected that there would be a few bumps and potholes along the way and in order for the growth to become robust, it might take a few quarters. Nonetheless, economic indicators highlight that an economic rock bottom has probably been reached and that recovery process is underway. Consider this:

    My analysis of IIP data showed how the numbers are not being interpreted correctly. IIP numbers are actually tracing a pattern of recovery, not a contraction. See the graphs below for IIP and PMI. Which is a better interpretation – that the economy is contracting OR that it is on a slow and steady recovery path?



    The bottom line is that the growth story is intact and a healthy recovery is in progress. In fact, this scenario of good fundamentals combined with unjustified fears is an ideal situation for long term investments.

  3. Amar   May 19, 2012 at 6:09 am

    Greece paranoia – a blessing in disguise for India

    The fears and paranoia surrounding Greece exit is likely to prove to be a blessing in disguise for India, via its impact on commodity prices and inflation.

    The sharp fall in commodities over the past few weeks is primarily driven by speculators making hay while the sun shines, or Greece related fear persists, so to say. Not to say that Greece related fear is the only reason. Of course there are a few others as we’ll see in the analysis below, but had there been no Greece factor, commodity prices might not have been making new intermediate lows.

    With Greece’s blessings

    All key global commodity prices are falling and making new intermediate lows. So, what’s causing it and what is likely to be the impact on the Indian economy and corporate results?

    The fall is caused by growth moderation in China, slower than expected recovery in the US, large stockpiles of commodities with suppliers and last but not least, a speculative selling driven by fears surrounding Greece’s exit.

    And what could be the possible impact for India? Given that India’s industrial recovery is progressing at a healthy pace, what it implies is that going forward inflation is likely to come down and corporate profitability will continue to increase. All because of blessings from Greece !

    Let’s take a more detailed look at the points made above