Budget 2015: Why Jaitley rolled out goodies for FIIs? This graphic offers clues

By Rajesh Pandathil & Kishor Kadam Finance minister Arun Jaitley has rolled out goodies for foreign institutional investors in a desperate bid to woo them in a year when he has set a sky high disinvestment target and the interest rates in the US are likely to rise. For one, he deferred the date to impose GAAR or General Anti-Avoidance rules by two years and also made its applicability prospective. Secondly, he removed their capital gains from securities transaction from the purview of minimum alternate tax (MAT). Thirdly, he also proposed to modify the permanent establishment norms to allow a fund manager to work from India, without resulting in adverse tax consequences. Introduction of GAAR by Pranab Mukherjee during his finance ministership had dampened the foreign investors’ sentiment for India. They have been demanding the implementation deadline, which was 1 April 2015, be postponed. Jaitley’s decision to defer the date of implementation would have been music to their years. As far as permanent establishment norms are concerned, as Zulfiqar Shivji of BDO India LLP says in this Mint report, the change will make fund managers happy as most of them “prefer to be closer to their investments than work from an offshore location”. So what is the reason behind the government’s love for FIIs? The simple reason is the high divestment target. The government proposes to raise Rs 69,500 crore through public sector stake sales next financial year. This is the highest target any government has set for revenue from this route. To say the least, it is an ambitious number, especially when considering earlier the failure in meeting the stake sale targets in the last five years. A look at the graphic above will show that on an average the government has been able to meet only about 64 percent of its stake sale target. The only year when it close to meeting the target was 2009-10, when the target was Rs 25,000 crore and the government managed to raise Rs 23,553 crore, about 94 percent. The least successful year was 2011-12, when the target was Rs 40,000 crore and the UPA managed to raise Rs 13,894 crore, about 35 percent. Even the Narendra Modi government, which had a booming equity market last year, could not raise the targeted amount. It managed to raise Rs 24,277 crore, just 77 percent of the targeted Rs 31,350 crore in 2014-15, that too after revising the target sharply down from initial Rs 58,425 crore (including Rs 15,000 crore from sale the government stake held in various companies through Suuti). What makes his task particularly daunting is the likelihood of the US interest rates rising by the middle of this year. The US central bank has dropped enough hints that the economy there is improving and it will raise the interest rates this year. In such an eventuality, the US markets will become more attractive for foreign investors, resulting in an exodus from emerging markets like India. Of the $ 42.4 billion, the FIIs have invested in Indian markets in 2014-15, $25.9 billion or 61 percent is in debt. A pullout will not only result in rupee volatility but also derail Jaitley’s divestment plans. So, if the government has to succeed in meeting at least 60 percent of the target, it has to keep the FIIs in good stead. And with a pick-up in corporate earnings and better tax buoyancy unlikely next financial year, the government is going to be solely dependent on divestment to meet its fiscal deficit target.