Manmohan Singh needs to find his inner wily fox. That’s the species the technocrat-turned-politician needs if he’s to revive what he calls the Indian economy’s “animal spirits”. There are ways the Prime Minister, now also finance chief, can get India moving again without tackling the political opponents of reform head-on.
Over the past eight years, Singh’s ruling Congress party has overpromised and underdelivered on reforms. If he is crafty, he’ll take a new approach. To start with he could draw a line under his finance ministry predecessor’s attempts to tax a gain Vodafone made on an offshore acquisition - efforts that continued after the Indian Supreme Court dismissed the tax claim. An end to talk of retroactive taxes on merger transactions and clarity about India’s tax regime going forward would cheer foreign investors.
Another step would be to remove barriers to mobilising capital in India. Ambit Capital estimates that over the last five years, the country’s average nominal cost of borrowing, at 12 per cent, was among the highest in all major emerging markets. Only Indonesia’s was higher and China’s, for instance, was a mere 6 percent.
Yet the capital is there — India’s domestic savings rate stands at 33 per cent of GDP. Part of the problem is that only about half that goes into financial assets. The other half is typically held in physical assets like gold and jewellery. Singh could try to find ways to encourage more of this into the insurance and pension systems where it will be recycled for investment.
The participation of insurance companies and pension funds in Indian stock and corporate bond markets is tiny, at about five percent versus 45 per cent to 50 per cent in the UK and United States according to report for the City of London Corporation. So it’s easy to see how even small tweaks to burdensome rules could, over time, bring the cost of capital down for investors in India.
Singh could, for example, liberalise investment regulations by increasing or removing limits on equity and corporate bond investments. Or he could get rid of tax and regulatory constraints on bond market development, like uneven stamp duties on issuance.
Big-picture economic reforms like privatisations are politically very tough. But India’s new finance minister can employ his technocratic expertise to make changes that happen under the political radar but still achieve meaningful benefits. With a bit of cunning, Singh could end up out-foxing more aggressive political animals.
