(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own)
By Jeff Glekin
MUMBAI, June 28 (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 chief, can get India moving
again without tackling the political opponents of reform
Over the past eight years, Singh's ruling 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 Indian 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
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
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.
- Indian 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.
- Reuters: India PM wants to "restart growth story"
So long, farewell
- For previous columns by the author, Reuters customers can
(Editing by Richard Beales and David Evans)