Tuesday, September 11, 2012

Business in India not taking ball, going home

When India pushed back on tax avoidance after the Vodafone case, lobbyists came out in full force opposition and people predicted investment would flee in the face of the tax reform, while I said that "if U.S. businesses really don't like what India is doing, they have a perfectly viable option, which is to do what they say they are going to do, namely, take their assets and go home.  But they do not want to do that."  This week in the Economist we get confirmation that business is not in fact fleeing India, tax & regulatory state notwithstanding:
At the start of 2012 India offered a cocktail that seemed guaranteed to be lethal for foreign investment: a faltering economy, corruption and political gridlock. In March came the final flourish, the equivalent of the barman spitting into your Death in the Afternoon. A budget was passed that aimed retroactively to tax Vodafone, the country's biggest foreign direct investor, and to clamp down on the holding structures used by most foreign investors, in particular the routing of money through the low-tax paradise of Mauritius.
In April alone, foreigners sold almost $1 billion of portfolio investments...Since April, however, portfolio investors have piled back in ... with net buying of some $5 billion of shares and bonds. This is surprising. There has been no clear improvement in India’s fortunes. Yes, there is a new finance minister and those tax rules have been delayed and diluted (although Vodafone’s fate is still unclear). But the political climate has soured further, lessening the chances of reforms or more prudent fiscal policy. 
The Economist concludes that it is the "resilience" of the firms, and not India's economy, that is responsible.  Maybe so, but it is at least as clear that a government that tries to prevent tax avoidance is not an obstacle to investment.  There is not much discussion of the diluted and delayed tax reform; the last I have seen suggests the matter is still on the table.

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