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N Chandra Mohan: No space for the growth story

Reviving the animal spirits of investors is easier said than done, especially when they face tremendous difficulties with doing business in India

N Chandra Mohan  |  New Delhi 

As UPA-II remains bogged down in crony capitalism-related corruption scandals, a serious concern is whether adequate attention can be devoted to salvaging the growth story. Prime Minister Manmohan Singh has even made this a matter of national security! The change of guard in North Block — with P Chidambaram back as finance minister for the third time — seeks to revive investor sentiment and boost growth. Getting back to the investment rate of 38 per cent of GDP attained in 2007-08 has also been announced as a target. How feasible are these objectives, considering the current preoccupations?

For starters, reviving the animal spirits of investors is easier said than done. Especially when they face tremendous difficulties with doing business in India. Policy paralysis during the last three years has led India Inc’s leading players to seek out opportunities abroad rather than at home. India’s outbound foreign investments of $43.9 billion (RBI data based on information furnished by authorised dealers in Form ODI) outpaced inflows of FDI of $27.8 billion for the first time in 2010-11. Foreign investors have tales of woe about operating in an environment in which economic reforms cannot be pushed through.

Redressing these investor-related concerns takes a lot more time than UPA-II has at its disposal. It has far more important preoccupations than “Coalgate” — assembly elections in states like Gujarat later this year, culminating in the national elections in 2014. When Mr Chidambaram presents the Union Budget for 2013-14 in February next year, it will be the last full-fledged budget to bolster UPA’s chances at the hustings. In this milieu, the will to implement much-needed measures to improve investor sentiment is bound to clash with the imperatives of the political business cycle.

The new finance minister, for his part, is taking steps to get speedier clearances for important infrastructure projects. He has met chiefs of public sector banks to provide cheaper loans to stimulate more spending on consumer durables like cars and housing. Unfortunately, he does not have the headroom his predecessor had to deal with the global economic crisis of 2008-09, when expenditures like the implementation of the Sixth Pay Commission award boosted consumer spending. Such expenditures had multiplier effects on industrial activities, leading to higher investments that shored up growth.

Mr Chidambaram is unlikely to be lucky a third time, as he does not have the rapid growth that provided a favourable context for his earlier stints as finance minister. During UPA-I, India was one of the fastest growing economies in the world, with GDP growth averaging 8.5 per cent per annum from 2004-05 to 2008-09. The faster pace of expansion led to buoyancy in tax collections, which enabled him to fund flagship welfare schemes and adhere (not successfully) to the deficit reduction regime mandated by the Fiscal Responsibility and Budget Management Act.

This sort of financial legerdemain is not possible when GDP growth is expected to plunge to 5.5 per cent this year and fiscal imbalances — reflected in high and rising fiscal deficits — are set to worsen. Gross tax collections will not be different from the low of 8.7 per cent of GDP in 2011-12, a steep drop from the peak of 11.9 per cent in 2007-08, while non-Plan expenditure on subsidies like diesel, LPG and food keeps mounting. The government will perforce have to borrow more and more to meet routine housekeeping expenditure. Two-thirds of such borrowings are to meet current expenditure in the Budget estimates for 2012-13. From where, then, will the Budgetary surpluses be generated for public investments in infrastructure to kickstart growth?

Given the low tax-to-GDP ratio, there is naturally tremendous pressure to raise revenues to fund flagship programmes including the new one on food security. This will no doubt result in aggressive efforts to revive partial sales of equity in public sector enterprises like the Steel Authority of India Limited and Bharat Heavy Electricals Limited to fund mounting spending. Instructions have reportedly been given officials in North Block to ensure that there is no slippage in this target of Rs 30,000 crore this year.

The finance minister has also assured investors that the UPA government will seek to regain the confidence of all stakeholders in the economy; remove the perceived difficulties in doing business in India and modify or fine-tune policies, if necessary. He will also review unpopular measures announced in the previous Budget on retrospective tax amendments and the introduction of a General Anti-Avoidance Rule to counter aggressive tax avoidance.

In spite of such intentions, however, the government will be loath to forgo the huge revenues that can be tapped through taxing offshore foreign M&A transactions. A ballpark estimate is that revenues of Rs 35,000-45,000 crore are at stake! Will Vodafone be exempt from these pressures? As the retrospective amendments now have the force of law, the buzz is that it will have to settle its tax liability out of court, perhaps minus the penalty and interest.

The upshot is that investor sentiment is unlikely to revive even though Mr Chidambaram has indicated that there will be greater clarity in tax laws, a stable tax regime, a non-adversarial administration and a fair mechanism for resolving disputes. Using Budgetary resources to step up public investments is not on so long as the subsidy burden keeps rising, and borrowings are increasingly resorted to, to meet current expenditures. Under these circumstances, raising the rate of investment to 2007-08 levels in order to restore lustre to the failing India growth story does indeed appear daunting.


The writer is an economics and business commentator based in New Delhi

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First Published: Sun, September 02 2012. 00:59 IST