It is a given fact that our stock markets are driven by foreign investors. India and Indians simply do not have the wealth required to keep the markets going. Most of Indians wealth is either locked in gold or real estate and a large part of wealth is not accounted for. Hence, it is difficult for our markets to be sustained by Indian money from legitimate sources. Further, unlike most western nations, we do not have pension or provident fund money chasing dreams in the stock markets. Apart from mutual funds and insurance companies, the biggest movers are the foreigners.
Similarly, our economy has a huge trade deficit that puts a huge downward pressure on the rupee dollar exchange rate. This gap is partly bridged by the remittances from those who have gone overseas to work and also by Foreign Direct Investment (FDI) that keeps flowing in to different sectors of industry and economy.
Having understood that foreign money is the prime mover of India and holds the key to economic growth, it is important that our politicians provide a set of rules that are consistent and fair. More important, there should be clarity in the rules relating to taxation and cess. This is extremely important and the moment we create doubts in the minds of foreign investors, they will choose to neglect this country. We have to remember that India is one of more than 200 destinations. In spite of being large in size and numbers, we attract a very miniscule part of global money. The primary reason for this is our archaic restrictions on foreign investments in different sectors. We keep putting limitations on sectors like agriculture or retail thinking illogically that it will harm us. At the same time, the government refuses to channelize money in to these sectors to make it big.
So, to keep the rupee and the markets stable, it is important that the government provide a set of rules that are simple and logical. The move of the government of India to introduce GAAR (General Anti-Avoidance Rules) created a confusion since it changed the rules of the investment game with retrospective effect from 1962!! Clearly, it looked like it was aimed at a single player and the collateral damage was terrible. Now, the government has ‘deferred’ the GAAR by a year or so. This is hardly any action. No investor like uncertainty. Sure, the government is fair to impose whatever rates of tax it wants on whatever transaction. However, it has to be with prospective effect and not with retrospective effect.
This causes fear and anxiety ( I do not wish to say whether it is warranted or not) in the minds of investors, who would simply prefer not to write that cheque for an investment in India. No investor is under compulsion to invest in any country or market. So, if we are seekers of money, we have to bend to the demands of the giver. To put it bluntly, beggars cannot be choosers. I mean no disrespect to the economy, but it is a simple logic that one who has the chequebook, calls the shots.
Whilst I personally think that GAAR will not mean anything negative to anyone when it comes to the final analysis, it has become an excuse in these uncertain times, for people to pull out or sell off. If GAAR had come in times of madness like 2007 or 2008, no one would have really been upset. After all, investors worldwide have too much money that is in search of safe havens. So they would have come in to India any way. However, given the economic conditions in the world, GAAR does look like a big negative, even if it is postponed to another day.
Given our crying need for foreign money, both in real and financial markets, it is ideal that government regulations be clear and unambiguous. Capriciousness in regulations scares away global investors, who give a lot of weight to government policies and regulations. It causes fear about the safety of investments as well as safety of returns. No investor likes uncertainty.
Surely, no one minds the due process of law being applied. In fact, one of the main selling points of India as an investment destination, used to be a legal system that was clear and transparent. GAAR comes in as a negation of this important selling point. We have hardly scratched the surface of global investment potential (if one looks at global inflow in to China) and the solution to all our economic problems lie in attracting global money and making good use of it. We need to put our “Welcome to India” sign in order.