PAWAN LUTHRA on retrospective tax, saffronomics and the $2 trillion investment pool
India’s Finance Minister Arun Jaitley’s recent visit to Australia highlighted India’s strong need for overseas funding to help build its infrastructure projects.
Prior to the Modi-led BJP government sweeping to power in May 2014, infrastructure projects such as roads, airports and ports struggled for funding. The demand for such services in both consumer and corporate terms was exploding, but the supply side was in most cases non-existent.
The Modi Government took this as their top priority, recognising that until infrastructure supply is addressed, economic growth will be stifled. With a country of 1.2 billion and an increasing aspirational middle class of young people forming the core, the corridors had to be opened for them to achieve their potential. With heavy demand on their own income and resources, it was time to look at overseas investments.
Australia has two pools of monies which are looking for long term sensible investments. The Future Fund, with current assets of over $118 billion, was set up by the Howard Government in 2006 to assist in taking care of the public sector’s long term pension needs. The other pool is the ever growing superannuation funds, with assets of just over $2 trillion. These savings, set aside to meet the long-term saving needs of Australians, could find a perfect home in the various infrastructure projects in India.
The two challenges which India faces on the international investments platform are those of political risk and that of saffron bullying, and to an extent, saffronomics. The recent stoushes which the government has had with Vodafone and the Cairns Energy Group have shone a light on the risks that are possible.
Vodafone, one of India’s largest corporate investors, has been involved in a string of tax disputes in India since it bought Hutchison’s local mobile business in 2007. In the long-running dispute, the telecom group was held liable for paying capital gains tax on the deal. In 2012, India’s Supreme Court ruled that Vodafone was not liable for any tax on the Hutchison deal. But the government then changed the law later that year to enable it to tax such deals retrospectively, demanding that more than $2 billion be paid. This issue of retrospective law changes worries international investors. The Modi Government is aware of this as it attempts to tackle the mess left behind by the Congress Government’s policy changes. It has promised that such retrospective policy changes will not take place on their watch; however, it cannot make any guarantees for future governments.
The other headlines which worry international investors is the saffron bullying in India which has been on the rise since the Modi Government came to power. Extreme right Hindu fundamentalists are increasingly getting more militant, and the BJP government has not shown any willingness to tackle some of the extreme measures head on.
A related challenge for international investors is the influence exerted by the BJP-aligned RSS on economic issues. The right-wing, Hindu nationalist volunteer organisation believes that the government is too soft on international investors with their Make in India campaign. Though fundamentally opposed to FDI in India, the RSS believes that these investments should come on their terms and not on those proposed by the investors.
Even with the risks of the above, Australian money will flow towards India. To meet their own mandates Australian funds need to look for good long term returns of approximately 11% to 14%, which India can deliver in a relatively stable political and economic environment. Sure there will be risk, as mentioned above, but such is the nature of the investment world.