The government of India's decision to delay a
controversial tax law
Monday sent markets higher, even as other Asian markets fell due to
concerns over Europe. However, while the tax law postponement may
boost markets in the short term, this outcome is indicative of a
lack of resolve by the Indian government that will hurt the Indian
economy (
EPI
,
quote
) in the long run.
[caption id="attachment_59409" align="alignright" width="300"
caption="Chaos in New Delhi"]
[/caption]
The law in question pertains to tax avoidance by international
companies operating in India. Foreign firms had been concerned that
this new law would
tax activity in the country retroactively
.
Such pernicious legislation would be hostile to foreign business
interests in the country and could expedite the outflow of foreign
direct investment (FDI) from India.
As Dinesh Kanabar, head of KPMG India's tax practice in Mumbai,
told the
Financial Times
: "It is clear that having met with investors the government
realised there would be lots of unintended consequences. It is
very positive that they are rethinking this
move
."
Although the Indian government eventually reached a decision
that will not alienate foreign investors, the process is indicative
of a troubling trend. The government's capricious nature has
created an environment that has made foreign companies wary.
On multiple occasions over the past twelve months, the Indian
government has proposed a major change in Indian law, such as
allowing foreign retailers to compete in the Indian market, only to
reverse the decision later.
Multinationals do not like to operate in countries where
government resolve is weak, as it makes the relative risk of large
capital expenditures difficult to assess. If India cannot ensure
that laws passed are immutable, companies will simply avoid
investing in the country.
Combined with
rising inflation
,
a troubling current accounts deficit
, and
political gridlock
, the Indian economy (
INDY
,
quote
) has a number of fundamental problems that must be addressed if
the country is to resume brisk growth rates in the future.
Disclosure: Author's immediate family is long EPI
