Is this the end of the road for GAAR?

The damage control has finally begun. After facing widespread criticism on a range of proposals contained in the Union Budget, finance minister Pranab Mukherjee has finally gone about trying to right the wrongs.

And there were many wrongs. On Monday, Mukherjee announced that the implementation of the dreaded and vague general anti-avoidance rules (GAAR), which had made foreign investors extremely skittish, would be postponed by a year. He also withdrew an excise duty on jewellery (gold traders had gone on a three-week strike in late March protesting the duty) and eased up on some other measures(read here , here and here ) as well.

Vodafone, however, remained on the hook for a proposed retrospective tax amendment, although the FM clarified that the tax proposal would not override provisions of India’s double taxation avoidance agreement with 82 countries. Tough luck, Voda.

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[caption id=“attachment_301983” align=“alignleft” width=“380” caption=“Overall, investors will be rejoicing. Reuters”]  [/caption]

Overall, investors will be rejoicing.The rupee jumped by a little more than 1 percent against the dollar, its biggest gain since 27 March, to 52.90, after sinking dangerously close to 54.30, its all-time low just a few days earlier. The Sensex soared by 400 points from the day’s low as well.

No one will argue that the Union Budget, instead of becoming a platform to boost India’s growth, had become an unmitigated public relations disaster among local businesses and foreign investors.

Now, with these various rollbacks, hope for the Indian economy and its attractiveness to foreign investors, who are the biggest driving force in the country’s financial markets, will revive again. “With GAAR implementation deferred by a year, inflows are likely to resume in the coming days, pushing USD/INR lower,” Standard Chartered Bank said in a note, according to The Economic Times. (That means the rupee should recover against the greenback).

The newspaper’s editorial also had an interesting point to make: “…the move to defer GAAR by one more year probably means that it will be buried. The next Budget will be this administration’s last full Budget before general elections in 2014. It is expected to be stocked with handouts and goodies. Given that, no finance minister will want to sour the popular mood by implementing tough anti-avoidance legislation.”

Let’s face it, no one is likely to complain.

Of course, all this does not mean everything is back to hunky-dory. India’s economic growth still remains sluggish at around 7 percent, but we can at least be thankful the government is no longer trying to make it worse with a bunch of ill-thought-out proposals.Inflation also still refuses to be tamed, and continues to limit the central bank’s ability to cut interest rates, which is something the economy needs.

And while the government has now rolled back some unfavourable measures, it still has done nothing to actively promote economic growth or reforms. In addition, a wave of anti-austerity sweeping across Europe also has uncertain implications for the future of the eurozone, so that remains on the risk radar of investors. Any heightened risk aversion by global investors will see fund flows into India suffer, GAAR or no GAAR.

Which is why, beyond a spurt of short-term optimism, there are enough reasons to ensure markets will be back in glum mood in a while. “Over the 6-12 months period, market direction would be ultimately determined by the macro environment and economic factors,” Saurabh Mukherjea, head of institutional equities at Ambit Capital, told DNA. “The European Union is likely to go through its usual cycle of pain, stumbling from one crisis to another. Considering these, India may not see huge upside as the global risk appetite is low currently.”

May be, but for now, we should just celebrate the lifting of some clouds over the Indian economy – and the fact that the government has let better sense prevail.