Moves by Finance Minister Pranab Mukherjee are bemusing, to say the least. Indeed. it is not uncharitable to wonder if the Ministry is lacking individuals with a grasp on basic economics. As it is, no one seemed to consider the impact on recent policies announcement on tax revenues needed to offset the large fiscal deficit or on the inflow of FDI.
With India requiring substantial foreign fund inflows to offset its current account deficit, you would think policy moves would aim to attract foreign investment. But both retroactive amendments to Indian tax law & the General Anti-Avoidance Rules (GAAR) sent notice to investors to look elsewhere.
Consider GAAR; a dunderheaded policy that reverses the conventional sense of justice that one is deemed innocent until proven guilty. But GAAR presumes that inappropriate tax avoidance is the case unless shown otherwise.
It is a good sign that the Government is capable of back-pedaling with it hears bad news. But it took a collapsing rupee, dramatic capital flight & a serious correction in the local stock market before they yielded.
It is encouraging that GAAR was delayed by one year, that the rate of capital gains tax on private equity investments was halved and the levy on imports of gold jewellery was withdrawn (albeit the hike in the import tax on gold remained at 4%). But that such foolish policy moves were contemplated does not bode well for India given that the global appetite for risk is receding.
Meanwhile, back at the Ministry of Finance, one imagines politicians and babus throwing up their hands in innocent wonderment at the damage that they have wrought.