Though the finance ministry has defended its Budget proposals, these have hit business confidence hard, pulling down the widely-tracked HSBC Purchasing Managers Index (PMI) for services to a five-month low of 52.3 points in March.
“Confidence sunk sharply since February, primarily since concern over the latest Budget announcement weighed on sentiment,” said a release by financial information firm Markit Economics on Wednesday. The firm compiles PMI data.
The Budget proposals on retrospective amendments to the Income Tax Act, which seek to bring foreign deals with underlying assets in India, like the Vodafone-Hutchison one, under the tax net, have drawn adverse reactions from foreign investors.
HSBC chief economist for India and the Asean region, Leif Eskesen, did not respond to any query on retrospective amendments. He, however, said the concern expressed in the survey “most likely refers to the lack of ambition, in terms of both the magnitude of the budgeted fiscal consolidation, as well as the lack of announcement of key structural reforms”.
The PMI in services fell 4.2 points from February’s 56.5 points, owing to the weak rise in new businesses, which in turn led to a slow increase in output. PMI above 50 points denotes growth, while that below 50 shows contraction.
Praveen Nigam, chief executive of advisory firm Amplus Consulting, said, “The retrospective amendment is a disaster, according to me.”
Though Vodafone is unlikely to leave India, there are more cases like this that would have implications on market confidence. “Why will foreign investors come to India when they know they may be taxed 20 years later for a transaction today?” questioned Nigam.
Recently, global industry associations had written to the prime minister, seeking reconsideration of the retrospective amendment to the tax laws. These had warned the proposed change had prompted widespread review of the costs and benefits of investing in India. UK Chancellor of the Exchequer, George Osborne, also raised the issue with finance minister Pranab Mukherjee.
HSBC’s India Composite Index, which covers both the manufacturing and the services sectors, dropped from 57.8 in February to a four-month low of 53.6 points.
Prices charged, as well as input prices, rose at a faster pace and sequential inflation remained above the historical average, stated the PMI survey. The rate of new order expansion slowed to a four-month low.
When asked why Indian companies were optimistic despite the Budget proposals hurting their sentiment, Eskesen said, “The growth is expected to remain relatively moderate in the coming quarters, but is expected to improve during the second half of the financial year on the back of sustained improvement in economic conditions and progress in structural policy reforms.” The easing of monetary policy, though limited in scope, would also help support a gradual recovery in growth, he added.
With inflation pressures still firm, the Reserve Bank of India would have to approach the easing cycle cautiously. It may have to stay on the sidelines if the inflation outlook does not improve significantly soon, said Eskesen.
