BoP hits alarming high of $185 billion

Last year (2011-12), India’s trade deficit ballooned to a record high of USD 185 billion, up sharply from USD 110 billion in the previous year. While exports were pegged at USD 303 billion in 2011-12, imports were up at USD 488 billion, resulting in a net Balance of Payment (BoP) of USD 185 billion, which is quite alarming. Two main factors that contributed to such high imports were crude oil and petroleum products, which stood at USD 155 billion and gold and silver, which accounted for imports of USD 61 billion.

Increasing customs duty on gold and silver may have a limited impact on gold imports and at best bring down the imports by about USD 10 to 15 billion. The real answer and the crying need to offset this rise in BOP is to attract FDI in a big way and create a climate conducive to foreign direct investments in India.

However, what the FM has done is exactly the opposite - the retrospective tax proposal by the FM has raised major concerns amongst corporates in the US, Britain, Germany, Japan and four other countries, which were planning to step up FDI in India, but will now hold back their plans.

So great has been the uproar in the US that 12 major Chambers of Commerce in the US have asked Timothy Geithner, who is the US Finance Secretary (equivalent to our Finance Minister), to intervene and speak to Pranab Mukherjee and put pressure on him to withdraw this proposal, which they see as an anti-reform step, lacks transparency and gives the taxman huge discretionary powers, therefore lending itself to harassment, redtape and corruption. Within a couple of days of this request, Timothy Geithner met Pranab Mukherjee in Washington and warned him about the growing concerns of many US companies who could be hit with huge losses if international business transactions are taxed retrospectively by India. This intervention by Timothy Geithner is unprecedented and took place at a meeting where Geithner called Mukherjee ahead of the World Bank meeting in Washington, which the Indian FM had gone to attend. Geithner specifically pointed out that these retro tax proposals had “considerably dampened the enthusiasm of US corporate giants about India’s investment climate”.

The warning by Geithner to Mukherjee comes days after George Osborne, UK chancellor, who, during a recent trip to Delhi, publicly lambasted the Indian FM, warning of potentially harmful effects on trade and investment. As many as 8 countries have termed this law as ‘draconian’, if implemented.

On the 19^th of April, Peter Beckingham, the Deputy High Commissioner of UK was in Pune to address the British Business Group and I happened to be present there. In his address, he brought up the retro tax matter upfront and went to the extent of saying that 3 UK companies had plans to invest in India in the current year, but now they have decided not to.

Even PM Manmohan Singh is feeling uneasy about this taxation, as he too feels it will severely affect the much needed FDI that India needs. As a result he has asked Pranab Mukhrejee to give him a detailed briefing on why he wants to implement such a law which is clearly controversial. This was done by Manmohan Singh a few days before the parliament met on 23^rd April to discuss and pass the budget bill. There is expected to be furore from the opposition over this issue.

While the retro tax will achieve very little, it will damage India’s image which already is in a precarious fiscal situation, with Balance of Payments rising at an alarming rate.

If this rise in BoP continues for another year, we will have very little forex reserves left. Are we going back to the pre 1991 days?