Reader response: Chidambaram is walking the talk

A reader responds to our article about India's budget.

On Monday, we described India’s budget as “not good” and accused finance minister P Chidambaram of playing to the political gallery.

Not everyone agreed with our assessment. The article prompted one reader in India to share his own perspective on the challenges Chidambaram is facing, from noisy political opponents to wholesale tax avoidance.

While his conclusion is not radically different from our own, he makes some interesting points along the way and we decided to reproduce the full response here:

I think the understanding of India is slightly misplaced in this article. We have de-regularised fuel subsidies. This itself has caused a huge uproar in India. The non-Congress ruling state governments are vehemently opposing the deregulation and asking for a price cut. It’s a tricky thing in India. Indian politics are much more complex than what meets the eye of the foreigner.

Regarding GST [a proposed goods and services tax], it’s a much deeper problem. Unlike other countries, or federal set-ups like the US, the revenue accruing through state taxes is higher in India. So states, with due respect to them, are not willing to compromise on their revenue streams. The negotiated settlements are happening in a phased manner and GST will get rolled out in the next few years.

Regarding investment from foreign investors, Chidambaram has actually simplified the FDI [foreign direct investment] and FII [foreign institutional investment] norms. Though it was done with good intention, the unintended consequences of round-tripping and tax-haven jumping is going to be there. In addition, India’s tax treaty negotiation with Mauritius hasn’t completed yet. Most of the FIIs are routing their money through Mauritius, which is certainly a cause of concern. With regards to the clause of Tax Residency Certificate, both Chidambaram and the finance ministry have come out with a clarification.

With our current account deficit at an all-time high, it will take some time for things to settle down. With the upcoming elections in 2014, the implementation of the reforms will be slow. Despite being an Indian resident, I will be advising a cautious and phased approach for foreign investment into India.

In response to: Chidambaram isn’t walking the talk, March 3, 2103

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