Retrospective tax amendments, delay in retail FDI made investors think twice about India: Supachai Panitchpakdi
March, 12th 2013
The United Nations Conference on Trade and Development (Unctad) today said the Indian government's move to amend the Income Tax Act, 1961, with retrospective effect announced last year had shaken investors' confidence on entering India. Supachai Panitchpakdi, its secretary-general, in an interaction with Nayanima Basu on the sidelines of an event organised by the Aspen Institute, also said the government's delay in allowing foreign direct investment (FDI) in the retail sector led to policy unpredictability. Edited excerpts:
In its latest report on global investment trends, Unctad said FDI inflows into India declined by 13.5 per cent in 2012. Where do you think the problem mainly lies? The problem is basically with predictability of the economic policy platform. First, I think there seems to be some uncertainty in handling certain cases in India, which has given rise to some major perceived inconsistencies. These issues have probably confused investors or made them think twice before coming to India. Second, there is the issue on infrastructure, a long-running one. This has a bearing on the entire trade facilitation issue and soft infrastructure. Third, the level of corruption in governance, true not only of India but other developing countries as well. Finally, India is trying to be more open in terms of services like what you did in the IT sector.
You said handling of certain cases by India gave rise to a perception of inconsistency in investors' minds. By that I meant some of the steps taken (by the government) on retrospective tax amendments, proposal on General Anti-Avoidance Rules (GAAR) and back and forth on retail. This back and forth in retail sector was not good. I can understand the problems on retail investment. But I am very supportive of reforms. The ultimate aim of the Indian government should be welfare of its people or consumers. Participation of outside retailers is good. In my own country, in Thailand, we have opened the retail sector and we in the beginning had to fight all kinds of opposition but ultimately today there is a coexistence of the mom-and-pop stores together with big players. This happened in China also. I saw it coming to India also. But this sort of back and forth was bad. I know some of the (political) parties in India will not like it because it affects the small players. You have to think of the consumers who are in billions whereas their business is in millions.
India's merchandise shipments registered a massive fall this fiscal. While the government had been insisting on venturing into newer markets, our competitiveness in traditional markets is increasingly deteriorating. What should be the strategy according to you? India is looking more to the east which is a good thing. The so-called Asean plus six will lead to integration of India together with East Asia. This is what is called the Regional Comprehensive Economic Partnership, which will give India the opportunity to be more involved with the growth in Eastern Asia. India is very strong in heavy manufacturing and services which I think can be advantageous for East Asia, which can support India with their expertise on light industry. Then India must look at productivity. India's level of productivity has somewhat declined which India was not able to link it with the technological know-how.
Another big worry this year is record trade deficit which has, in turn, led to a huge current account deficit (CAD), sending the government into a tizzy. While some say imports need to be controlled, it becomes impossible as these are mainly for domestic consumption. Your thoughts?
Having a huge current account deficit is not always bad if the composition of your deficit is because you are investing a lot in capital goods. With such a high growth, you are bound to have a big CAD.
How important is it for India to sign free-trade agreements (FTA)? Do they really help?
You need unilateral trade liberalisation, which India is committed to; like when you opened the insurance sector, it was a unilateral decision. But all these FTAs and RTAs (regional trade agreements) are more for geopolitical interest. They do not sort out the issues. It only creates a huge list of rules of origin. The important thing is development of regionalism. This market being so huge, you do not need so many regional agreements, but you need to work with the World Trade Organization (WTO)’s framework.
What is your outlook for global trade for 2013-14?
Well, last year, it was very low. It was 2.5 per cent. This year, the forecast says it will be 4.5 per cent. But I have doubts because trade financing, the bulk of which is done by the European banks, is coming down. They are leaving trade financing because they cannot increase their equity base. They see trade financing as high-risk whereas mortgages are seen as lower risk, which is what I do not understand. To me, it is quite alarming.