BREAKINGVIEWS - Manmohan Singh needs cunning to boost economy

MUMBAI Thu Jun 28, 2012 4:51pm IST

Prime Minister Manmohan Singh smiles before his meeting with China's President Hu Jintao in New Delhi November 21, 2006. REUTERS/B Mathur/Files

Prime Minister Manmohan Singh smiles before his meeting with China's President Hu Jintao in New Delhi November 21, 2006.

Credit: Reuters/B Mathur/Files

Related Topics

MUMBAI (Reuters Breakingviews) - Manmohan Singh needs to find his inner wily fox. That's the species the technocrat-turned-politician needs if he's to revive what he calls the Indian economy's "animal spirits". There are ways the prime minister, now also finance minister, can get India moving again without tackling the political opponents of reform head-on.

Over the past eight years, Singh's Congress party has overpromised and underdelivered on reforms. If he is crafty, he'll take a new approach. To start with he could draw a line under his finance ministry predecessor's attempts to tax a gain Vodafone made on an offshore acquisition - efforts that continued after the Supreme Court dismissed the tax claim. An end to talk of retroactive taxes on merger transactions and clarity about India's tax regime going forward would cheer foreign investors.

Another step would be to remove barriers to mobilising capital in India. Ambit Capital estimates that over the last five years, the country's average nominal cost of borrowing, at 12 percent, was among the highest in all major emerging markets. Only Indonesia's was higher and China's, for instance, was a mere 6 percent.

Yet the capital is there - India's domestic savings rate stands at 33 percent of GDP. Part of the problem is that only about half that goes into financial assets. The other half is typically held in physical assets like gold and jewellery. Singh could try to find ways to encourage more of this into the insurance and pension systems where it will be recycled for investment.

The participation of insurance companies and pension funds in Indian stock and corporate bond markets is tiny, at about five percent versus 45 percent to 50 percent in the UK and United States according to report for the City of London Corporation. So it's easy to see how even small tweaks to burdensome rules could, over time, bring the cost of capital down for investors in India.

Singh could, for example, liberalise investment regulations by increasing or removing limits on equity and corporate bond investments. Or he could get rid of tax and regulatory constraints on bond market development, like uneven stamp duties on issuance.

Big-picture economic reforms like privatisations are politically very tough. But India's new finance minister can employ his technocratic expertise to make changes that happen under the political radar but still achieve meaningful benefits. With a bit of cunning, Singh could end up out-foxing more aggressive political animals.

CONTEXT NEWS

- Prime Minister Manmohan Singh said on June 27 that he wanted to revive the "animal spirits" of Indian economic growth. Singh also took on the finance minister portfolio on June 27 following the resignation of Pranab Mukherjee, who is campaigning for the ceremonial role of president.

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

(Editing by Richard Beales and David Evans)

FILED UNDER:

Reuters Showcase

FMC-SEBI Merger

FMC-SEBI Merger

Regulatory shakeup could revive commodities markets   Full Article 

Market Eye

Market Eye

Sensex, Nifty end higher after bumpy budget-day trading  Full Article 

Tax Incentives

Tax Incentives

Budget woos foreign investors  Full Article 

Excise Duty

Excise Duty

Cigarette makers fall after budget hikes excise duty  Full Article 

Welcoming the Budget

Welcoming the Budget

India Inc cheers corporate tax cut, simpler rules  Full Article 

Gold Price

Gold Price

Gold prices to rise after budget keeps import duty high  Full Article 

Fuel Prices

Fuel Prices

IOC to raise diesel, petrol prices from Sunday  Full Article 

Moody's on Budget

Moody's on Budget

Budget "credit neutral" from a ratings perspective - Moody's   Full Article 

Reuters India Mobile

Reuters India Mobile

Get the latest news on the go. Visit Reuters India on your mobile device  Full Coverage