Asian Development Bank (ADB) Managing Director Rajat Nag says Standard and Poor's (S&P) move to cut the outlook on India’s ratings from stable to negative would have a negative impact on investor sentiment. The Budget proposals on retrospective amendments and the General Anti-Avoidance Rule (GAAR) would also fail to provide the correct signals to investors, he tells Dilasha Seth in an interview. Edited excerpts:
Would the cut in S&P’s outlook for India hit foreign investment in the country? The cut in outlook is negative. What S&P said was nothing new. It has already been debated. However, an announcement from S&P does have a psychological impact. It is the information content, not in terms of analytics, but in terms of the fact that S&P has suddenly said it. It has an influence. Investors all over the world would look at it and be wary. But it’s more of a warning signal and again points to the reforms front. There is nothing S&P has said that is not already on the cards. But the question is which reforms would the government pick, proceed with and implement.
Retrospective amendments to the Income Tax Act and the GAAR have led to a lot of noise from foreign investors. Is this a reason to worry? Let’s separate the noise from the signal. Many countries have changed laws retrospectively; India is not the first. It’s not a question of whether it is legal. The question is what signal does it give to the investor community? I must say the signal is negative. The perception is of changing rules retrospectively, changing the rules of the game after the game has begun. Another question is what are the signals you want to give to foreign investors you want to woo? India definitely needs foreign direct investment. I am afraid the signal being sent out now is negative.
ADB projected growth in India’s gross domestic product for 2012-13 at seven per cent, against the finance ministry’s projection of 7.6 per cent.
Do you mean in 2012-13, India would grow just 0.1 percentage point higher than in the previous financial year? We had to make assumptions based on the international scene —what would happen to growth in the US, Europe Japan. We are projecting growth of 1.1 per cent this year and 1.7 per cent next year in these areas. So, the first parameter is the international arena, as India’s trade would be affected by this. Then, we had to make certain assumptions on the fiscal deficit in India. We are projecting it at 5.1 per cent in 2012-13. The third element is reforms in India have run into headwinds, and we had to make assumptions on how second-generation reforms would actually take place. Based on all these, we think a growth rate of seven per cent is likely.
Do you think India can rein in the fiscal deficit at 5.1 per cent this financial year, as projected in the Budget? Concern on the fiscal deficit means some fairly important reforms to rein in expenditure and enhance revenue are very important. There are other reforms on the table that have to be implemented. Now, the good thing is there is clear understanding of what those reforms need to be. The Bills are ready; the detailed work has been done. The Bills are in Parliament and before the standing committees. It is now a question of implementing these. We believe that is very important, that there will be political consensus on taking some of these reforms forward, the absence of which would have very serious detrimental effects.
The general elections are just two years away. Do you think second-generation reforms would be carried out before that? Political processes have dynamics of their own. I think it will be important to recognise carrying out all reforms at the same time may not be politically possible, even if it may be desirable. I am talking about polity as a whole. There has to be some sense of priority. What are the reforms that we need to carry out now? For example, the issue of fuel subsidy is a pressing one, as fiscal deficit stood at 5.9 per cent in 2011-12.