Expert view: The real story is India's business-friendly states

The government’s massive fiscal and current account deficits and its political paralysis have not only stalled investment but have also India’s parliamentary business tied up in knots. And Wednesday’s Standard & Poor’s India credit rating outlook merely reiterated the economy’s problems, sending Indian bonds, stock and the rupee lower.

But why is there so much gloom and doom about India across the board? Interestingly, Evan A. Feigenbaum, Adjunct Senior Fellow for East, Central, and South Asia, of the Council on Foreign Relations, presents a different view asking us to focus on the business-friendly states rather than the country.

Feigenbaum lists out six main reasons for why foreign investors are so wary of India at the moment.

[caption id=“attachment_289238” align=“alignleft” width=“380” caption=“The government’s massive fiscal and current account deficits and its political paralysis have not only stalled investment but have also India’s parliamentary business tied up in knots. Reuters”]  [/caption]

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1. Under the ruling UPA, major reforms like pension, foreign direct investment, tax reforms have all been stalled. Although in 2011 the Parliament sat for a total of 73 days, around 30 percent time was lost due to disruptions in the Lok Sabha while 35 percent was lost due to disruptions in the Rajya Sabha over issues like FDI and corruption. Moreover, of the 54 Bills listed for consideration and passing; only 28 were passed. Of this, 18 percent of the bills were passed in less than five minutes! Wondering which ones? Examples include the Chartered Accountants (Amendment) Bill, 2010 and the National Capital Territory of Delhi Laws (Special Provisions) Bill, 2011 etc. And with general elections due in 2014, any big bang reforms are unlikely in the next two years.

2. Even though India received increased foreign direct investment in 2011 than 2010, lack of big ticket policy announcements belied high expectations leading to gloom among investors.While India attracted FDI worth $22.52 billion between January and September, 2011 against $15.97 billion in the same period last year, FIIs withdrew Rs 2,497.50 crore between January and December 20, exerting pressure on the rupee which dropped by 16 percent against the US dollar in 2011.

High cost of oil and gold imports, a balooning current account and fiscal deficit , unexpected government borrowing and no dis investments will only add pressure to the rupee. Infact CLSA forecasts the rupee at 60 to a US dollar, a depreciation of another 12 percent.

3. Meanwhile, India’s fiscal deficit swelled to about 5.9 percent of GDP in the fiscal year that ended in March, far above the government’s 4.6 percent target. Given the government’s commitment to welfare schemes and its hefty subsidy burden, it is unlikely to tighten its belt any time soon. But not just deficit, there is major uncertainty over India’s growth too. On Wednesday S&P said India would grow just 5.3 percent in FY13 against the government’s forecast of 6.1 percent.

4. FIIs have stayed away from Indian markets this month due to the uncertainty over its General-anti avoidance rules over tax changes and the Vodafone controversy. The cloudy outlook can improve if there is some movement on reforms in the coming days. But, given the track record of UPA II its like asking for too much. Infact global trading groups have already threatened to pull out of India .Foreign Institutional Investors have assets of more than Rs 10 lakh crore. This constitutes 17 percent of the capitalisation of India’s equity markets. In addition, they invest substantial sums in Indian government and corporate debt.

5. Even though Mukherjee promised that the S&P warning is no reason to panic and that major financial reforms will be passed in the coming weeks, the fact remains that the problem is not just at the centre but also sectoral. India’s sector stories have just gotten uglier by the day. The aviation sector is reeling under debt and heavy losses and is in dire need of a bailout. But the decision to raise the ownership limit for foreign airlines to 49 percent in domestic carriers has been delayed several times for the last one year. The same holds true for the power and the telecom sector. And lets not even talk about the oil and gas sector, which is projected to lose Rs 208000 crore on selling auto and cooking fuel at government controlled rates in 2012-13 as losses on diesel sales touched a record Rs 16.16 per litre.

6. And now even India’s billionaires think it’s time to quit India. Why? As Ajay Piramal says, “The problem isn’t opportunity, its India.” With the country mired in corruption, bureaucratic red tape and unclear and changing government policies, many of the men who made their billions here are saying maybe it’s time to quit India. Hence, without investment, how does one expect an India growth story?

But Feigenbaum, has an interesting point to make. “India’s most exciting stories are in the states, not at the federal level. And the reality is that companies and investors will increasingly have opportunities in business-friendly states that are less regulated from New Delhi and, thus, are less subject to government control,” he argues.