So, the INR is now seen as a temporally, if not structurally, weak currency that can barely hold its own value, leave alone become a serious trading or reserve currency in the foreseeable future. India now seems as if it is much more inured and practised at coping with prolonged failure. It seems to know how to cope with that much better attitudinally. Contrary to assertions by the FM, PM, RBI and UPA-2 leaders, none of the wounds that India is suffering from have much to do with negative global influences or Europe. At most, those factors may have had only a marginal impact on growth and inward investment. The damage done has been self-inflicted.
The really devastating impact of MoF/FM misjudgement and malfeasance has been on overall investment and in not relieving mounting supply-side constraints sooner. The FM, in particular, has played a leading role in convincing investors in India and around the world that India is not a place worth investing in. Indias wounds have been worsened by an injudicious view driven by aggressive posturing by the FM/MoF, goaded by their tax hawks, about the tax losses India suffers from its DTA agreements with various countries (in particular supposed tax-havens such as Mauritius) and its contradictory, if not absurd, positions on GAAR, which have attracted the derision of the world at large.
Immense damage has been caused by a failure of judgement, obtuseness and obstinacy in the vindictive vendetta that has been conducted against Vodafone in particular, and foreign firms in general, on the capital gains tax issue and GAAR. No mention is made at all about the significant tax gains (in direct and indirect taxation) that have been derived from inward FDI and about the losses that would be incurred if such FDI flows ceasedas they now seem to be doing.
If GoI/MoF were so concerned about revenue losses to the exchequer, the PM and FM would have done better to look more closely at their neighbours in Parliament and state legislatures. They could apply more vigorously and impartially laws on assets disproportionate to income. That approach would have provided them with a triple-whammy. This would have dealt with the issues of black money, corruption and tax evasion/ avoidance all at the same time. The revenue raising possibilities from that source would have made Vodafone look trivial by comparison. Had GoI/MoF done this, they would have drawn more effective attention to the generation of black money which official India is exerting every sinew to evade, knowing that to take serious action on that issue would be to indict virtually the entire political class in the country and bring into the black money net most corporate leaders as well.
The egregious and severely damaging misjudgements on the tax issue and the mismanagement of the Indian macro-economy since the change of leadership of the finance ministry in 2009 have introduced the kind of uncertainty into investment decisions that now make banana republics and places like Rwanda and Congo seem almost sagacious by comparison. How could this have happened The answers seem obvious in retrospect. The political and bureaucratic leadership of the post-2009 finance ministry appears to have been almost childishly clueless about how finance or economics actually works. All of India, and corporate sycophants dependent on the state-owned banking system for liquidity and long-term loan largesse have been worshipping a false godas we do relentlessly even where corporate heads are concerned. It would be funny, if it were not so tragic, that one needs to screw up a country before one can be an eligible candidate for that country's Presidency!
To compound the problem, above that level, GoIs top leadership appears to have as little clue about what leadership or good governance is all about. The other big beasts in the Cabinet (the ministers of home, defence and external affairs) all seem to be in the wrong jobs, which play to their weaknesses rather than their strengths. As a consequence, GoI and India have lost all credibility at home and abroad. The impression they convey is of gross incompetence.
At the political leadership level in the UPA, Madam Sonia and Master Rahul Gandhi appear to have no clue about anything at all, if the results of recent state elections are to be judged dispassionately. They still believe in an India that is to be managed politically by hand-outs, subsidies and populist sops that break the budget. Their attitudes and leadership make proper macro-economic management by anyone almost impossible. They still do not believe in continuing with structural reforms, widening the distance between the polity and the economy, thus limiting the amount of damage the former can do to the latter through negligence, populism and plain economic ignorance.
They do not believe that significant reforms are needed along with an urgent programme of privatisation, beginning with Air India, extending to state-owned companies in telecoms, transport, minerals, natural resources, manufacturing, services (such as transport and tourism) and most of all privatising the state-owned financial system. It is through the state-owned banks (SoBs) that many of the weaknesses of the Indian economy are aggravated and exacerbated. The SoBs are also the conduit for exercising the kind of political influence that results in the kleptocratic quasi-market economy that has emerged in India post-1991; through an inimical but pervasive public-private partnership (PPP) between political dynasties and large business houses. Taken together, the top leaderships in MoF, GoI and UPAindividually and collectivelyare the problem, not the solution. Once that diagnosis is accepted, a cure can be found. Until then, one can only hope that the next election brings more succour and relief to India than is the case now.
What needs to be done urgently is to revive capital investment and growth in the Indian economy. Given the state of public finances, the current account deficit, the collapsing Indian rupee, and structural inflation, which will take prolonged tightness of monetary policy to bring under control, GoIs room for manoeuvre is limited. But there are options to be exercised. The first must be to revive confidence in the government on the part of domestic and foreign investors. For that to happen, the MoFs absurd obsession with imaginary tax losses has to be dropped in favour of more investor-friendly policies that attract inward foreign investment in large amounts. If that happens, it will spur domestic investment concomitantly.
A start can be made by putting the insurance and pensions Bills immediately before parliament, with GoI doing whatever it must with its allies and opposition parties to get these passed. If the cap on FDI in insurance were lifted from 26% to 49% in the next few months, it would result in a significant inflow of FDI that would spill over through linkages into private corporate capital investment as well as investment in infrastructure. Both are needed urgently to relieve supply-side bottlenecks that have built up in the economy over the years. Similarly, the counterproductive debates and hold-ups on limiting FDI in multi-brand retail, and on moving more urgently with privatising Air India (in which continued public investment is a waste of money and benefits no one, least of all the poor, to run a state-owned airline simply for the personal convenience of the political class), BSNL, MTNL, Coal India and SoBs. GoI ought to commit itself to privatising all state-owned enterprises by no later than 2025 in a phased manner. Those steps might indicate to the world that GoI is serious about undoing the immense damage it has done.
This piece concludes the three-part series.
The author is chairman, Oxford International Associates Ltd