The Chinese paramount leader, Deng Xiaoping, once famously quipped: "The color of the cat doesn’t matter so long as it catches mice." The Indian government too seems to be veering round to this more pragmatic view insofar as source of funds for investments are concerned.
It has been common knowledge among the officialdom as well as the commentariat that black money generated in India goes to clandestine foreign banks through the subterranean hawala routes and comes back to India duly laundered. And in what form? Well, often designated in US dollars. The government, therefore, taking a strict no-nonsense and moralistic approach had been disallowing foreign investments from Indian joint ventures abroad as well as from wholly-owned foreign subsidiaries of Indian companies. They were branded ‘suspect’. But it has perhaps taken a cue from the Chinese dictator’s dictum, and all set to relent. This is a welcome thaw because the country badly needs investments in the context of steadily deteriorating Gross Domestic Product (GDP) growth (there are strong apprehensions that the next quarter’s may well slip below 4 percent).
This isn’t a knee-jerk reaction or a one-off phenomenon. The trend has been discernible for a while. In the stock markets too, round-tripping has been allegedly rampant, with Participatory Notes (PN) coming handy. PN is an opaque instrument that is used by registered (with Securities and Exchange Board of India or SEBI) Foreign Portfolio Investors (FPI) to enable unregistered foreign entities and individuals to invest in India through the registered FPIs.
It is believed that many an Indian promoter used this latitude to roundtrip and use his black money stashed away abroad productively not only to ramp up his own company’s share prices but also to play the market in general. Despite the SEBI relaxing the strict registration norms so as to welcome those clambering onto the PN bandwagon, PNs have been growing at a healthy clip. Investments in the domestic capital market through participatory notes, led by equity allocation, rose to Rs 81,220 crore at the end of April 2019 on hopes of favourable market conditions.
The third straw in the wind about the government’s new-found pragmatism is its decision not to rock the startup boat too much. Earlier, it was obsessed with the suspicion that crooks are bringing their black money duly laundered by wearing the mask of angels. Yes, angel investors had a torrid time proving that their investments in Indian startups at mind-boggling premiums were genuine. The Budget 2019 assuaged their feelings by agreeing not to launch an enquiry once the Department of Industrial Policy and Promotion (DIPP) norms on startups were met to its satisfaction.
The government seems to have come to the realistic and sober conclusion that it is not for it to tame round-tripping. On the contrary, it is for the world order to discipline countries with lax banking, investments and tax laws that beckon crooks and sundry despots of the world. The Organisation for Economic Co-operation and Development (OECD) and G-20 are already girding their loins and acting on their resolve to prevent evil practices like base erosion and profit shifting (BEPS) that are indulged in by multi-national companies (MNCs) and transnational corporations. The point is it is both churlish and impractical to spurn investments in hard currencies.
Moralists might bristle at this government’s seeming climb-down from its resolve to fight the black money menace. But extraordinary situations not only call for extraordinary measures but also require stooping to conquer. The first and foremost need of the hour is to spur investments and make India a manufacturing destination. Only then it can become an export hub.
The reduction of corporate tax rates by themselves is not going to spur investments. If ‘suspect’ sources are baulked at, investments would suffer. Wisely, therefore, the government has decided not to put barriers on investments from abroad though round-tripping might be written all over them. A somnolent economy cannot be revived by government spending alone on infrastructure. Manufacturing needs to be revved up. That alone would generate employment in millions.
(The writer is a senior columnist and tweets @smurlidharan)
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Updated Date: Nov 18, 2019 16:39:59 IST