Focus on home, not FIIs: Singh

A fter he took charge of the finance ministry, the Prime Minister Dr Manmohan Singh has launched a damage control exercise in right earnest. There has been a slew of announcements intended to revive investor sentiment, reassure foreign investors, boost capital flows, bolster market sentiment and stem the rupee’s slide.

Published: Mon 9 Jul 2012, 11:21 PM

Last updated: Tue 7 Apr 2015, 12:22 PM

One of his first actions was to put the draft guidelines on the General Anti-Avoidance Rules, which had spooked foreign investors, on the internet for comments and suggestions. It is clarified that they will not apply retrospectively (context: Vodafone). To reassure foreign investors further, it was clarified that these guidelines will be finalised only after the prime minister’s approval after taking into account the feedback the government received. Earlier, RBI had allowed FIIs to buy $5 billion more of government bonds and corporate to borrow $10 billion more abroad.

These measures were welcomed enthusiastically by the equity and currency market, but the warmth soon gave way to caution. More tellingly, an auction of government securities and corporate bonds worth $10 billion on July 4 for foreign investors remained heavily undersubscribed, despite offering much higher yields than Italy and Spain.

The market reaction only highlights the time-tested insight that investors and creditors do not rush in just because you open your doors. Obviously, factors such as risk aversion and weak growth outlook are holding foreign investors back, who may be wary of investing in a country which is on the verge of a rating downgrade.

Dr Singh’s actions imply that pushing the value of the rupee back up is the top priority, that market sentiment is more important than the overall business confidence and that fixing the external (current account) deficit is more important than the internal (fiscal) deficit. These priorities are questionable. A weak rupee helps exports and attracts foreign investment on its own. If business confidence and profit margins improve, market sentiment is bound to revive. And if fiscal deficit is curbed by government consuming less, imports would be reined in.

To be sure, all these external goals are important, but they are not the primary challenges. As Dr Singh himself pointed out, ‘there are no international solutions to the problems of a country of India’s size, of India’s diversity. So it is obligatory on us? to restore the momentum of growth that this country is capable of and which this country needs.’

This is what the trade, industry and the investor community at large expects him to deliver. The actions announced so far are politically easy. There is much more that Dr Singh can do without inviting serious political opposition.

Thus, he could permit greater FDI in aviation and insurance; issue new licences for more private sector banks, expedite the Delhi Mumbai industrial corridor development; allow Cairn India to develop fields that could get another 65,000 bpd of oil; launch cash transfer of food subsidy in select districts; ask education minister Kapil Sibal to leave IITs alone; allow open access to power consumers; quickly sort out the mess in telecom by issuing simple rules to price spectrum at reasonable rates and kill once and for all the regressive retrospective tax amendments.

Taken together, these will be enough to convince the industry and investors that he means business. Implemented quickly and transparently, they could earn him and his party valuable political capital which could then be deployed to tackle politically sensitive issues related to Goods and Service Tax, land acquisition, mining, environment etc. Focus on reforming the home economy, Dr Singh. Dollars will follow.