India's flip flops, poor business climate scaring away US investors

US companies have grown increasingly 'concerned about the economic relationship, fearing that the investment environment has deteriorated, that domestic political challenges are slowing the pace of reforms.'

Uttara Choudhury June 13, 2012 10:09:25 IST
India's flip flops, poor business climate scaring away US investors

New York: External Affairs Minister SM Krishna billed and cooed sweet nothings at American business leaders while promising them that India would bounce back, but US industry leaders made their frustration plain with the government's flip flops, policy inertia and the absence of significant reforms to sustain growth.

India's proposed retroactive tax provisions have sparked vitriolic American criticism and warnings that investment plans by overseas companies could be reconsidered.

"Disturbing flip flops and increasing signs of an absence of predictable investment and business climate ... are hampering India's progress and scaring away foreign investment," Ajay Banga, new chairman of the US-India Business Council and CEO of MasterCard Worldwide, told a leadership summit in Washington on Tuesday.

Indias flip flops poor business climate scaring away US investors

India's proposed retroactive tax provisions have sparked vitriolic American criticism and warnings that investment plans by overseas companies could be reconsidered.

White House international affairs adviser Michael Froman added that US companies have grown increasingly "concerned about the economic relationship, fearing that the investment environment has deteriorated, that domestic political challenges are slowing the pace of reforms."

New Delhi's policy incoherence and the absence of significant reforms to sustain growth have now turned India's slowdown from a cyclical one to something that is systemic. The economy in the year's first three months grew just 5.3 percent from a year earlier, the slowest quarterly pace since early 2003. India's inflation rate is over 7 percent, and the fiscal deficit has been allowed to swell to 5.9 percent of GDP thanks to a raft of subsidies.

Shockingly, one day after the GDP data, the cabinet met to agree on removing restrictions on the export of skimmed milk powder and broke up without discussing the country's economic predicament. With a government in complete denial, it was not surprising to see Krishna blame India's slide on "global interdependence" and the eurozone emergency.

"In an era of global interdependence, not everything is within the powers of national governments. But we are confident we will restore investor confidence and regain momentum and growth," said Krishna.

Ron Somers, president of the US-India Business Council, said he hoped India and the US could finish ongoing talks on a Bilateral Investment Treaty (BIT) by the end of the year. Analysts say that given India's threat of retroactive taxes on companies the US is keen on the treaty as it would provide certain safeguards for business investors and a forum for resolving investment spats.

Ahead of a meeting on Wednesday with US Secretary of State Hillary Clinton, Krishna signaled that India might raise the industry demand for more work visas. There has been a recent rash of controversial denials of L1B visas (for specialised knowledge workers) by the American consulate in Chennai.

"For our businesses, too, there are pressing issues: whether it is the worsening environment for mobility of professionals or the protectionist sentiments against the global supply chain in services industry," said Krishna.

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