FE Editorial : Drop GAAR, indicates BoP

Written by The Financial Express | Updated: Jun 30 2012, 06:17am hrs
The confusion over GAAR guidelines couldnt have come at a worse time. RBIs balance of payments data, which show a steady worsening (at 4.5% of GDP, Q4 current account deficit is worse than Q3s 4.3%), make it clear India desperately needs to attract forex flowsin such a situation, whether it is morally right to tax FIIs may not be as important as it is to attract them. At least for now. Some numbers will help clarify the picture. While FII investments were a high $8.8 billion in equity and $4 billion in debt in Q4 FY12, in the April to June period (till date) they were minus $1 billion and $2 billion, respectively. Apart from the slowing of the Indian economy, the real change that FIIs reacted to was the budget which brought in the retrospective Vodafone taxation and the GAAR.

Juxtapose this with Indias forex needs in FY13, and the implications of GAAR become clear. As compared to the FY12 current account deficit of $78 billion, analysts expect the FY13 CAD to be in the region of $65-70 billion, largely due to the fall in oil prices. Where does this CAD get financed from If you assume FDI inflows for FY13 at $22 billion, the same as FY12, that leaves around $45 billion uncoveredthe FDI target looks ambitious given the lack of reforms, but let that be. The rest will have to come from FII and banking capital like NRI depositshigher interest rates will help the latter, but increased FII flows are vital. What makes things worse (http://goo.gl/echmV) is that, with investors turning risk-averseas evidenced by crude prices fallingFII and other such inflows tend to remain low. But try explaining larger strategic objectives to the taxman.