India's reputation takes a beating as the government plays ducks and drakes with policy
Rahul Dhir, the 45-year-old managing director and CEO of private oil producer Cairn India, is an exasperated man. In the six years that he has been running Cairn India, Dhir has battled bureaucratic red tape, unfriendly policies and systemic friction. But it still didn’t prepare him for Finance Minister Pranab Mukherjee’s Budget speech on March 16. The company is bracing for a total hit of about $2.5 billion if the minister’s plan to raise the cess on crude oil to Rs 4,500 per tonne goes through. By the end of that day, Cairn India had lost nearly a billion dollars in market capitalisation.
On March 22, Dhir wrote a stinging letter to Petroleum Minister Jaipal Reddy and Prime Minister Manmohan Singh saying that the move could affect his company’s future investments in India. He reminded them that Cairn India had earlier withdrawn—in good faith—international arbitration against the government on the issue of royalty and cess payments in return for letting Vedanta Resources buy a majority stake in the company. “These [fiscal viability of contracts and viability of marginal fields with additional cess] combined are a disincentive to further foreign investment in the E&P [exploration and production] sector…,” the letter warned.
“We are on pause now,’’ Dhir told Forbes India about the $6 billion of planned investment in the Rajasthan fields to double oil production to about 3,00,000 barrels a day.
No policy announcement in recent times has upset foreign investors and created a perception of arbitrariness as Budget 2012-13. While the UPA-II government had become infamous for its inertia, nobody had expected it to reach into the past to fill its coffers. That is what the finance minister did with retrospective amendments to tax laws, making a recent Supreme Court verdict against the taxman’s demand of $2.2 billion on British telecom company Vodafone ineffective, and raising fears of diluting the authority of even the land’s final word of justice.
“India will lose significant ground as a destination for international investment if it fails to align itself with policy and practice around the world and restore confidence in the relevance of the judiciary,’’ a group of seven trade bodies, including Confederation of British Industry, Japan Foreign Trade Council Inc and United States Council for International Business, that together represent about 2.5 lakh companies, wrote to Manmohan Singh on March 29.
Justifying the amendments, the finance minister said, “India is not a no-tax country; it has a determined tax rate. Our country is not and cannot be a tax haven.’’ But that is not even anybody’s case.
“Nobody questions the right of the state to tax income, but the retrospective levy combined with a spate of other recent developments have created a groundswell of uncertainty,’’ says Percy Billimoria, senior partner at corporate law firm AZB and Partners. Billimoria says that there appears to be a sense of invincibility about the economy among policy makers but investors are not going to commit capital and move high tech manufacturing to India unless there is stability in tax and economic policies and simplicity in the regulatory framework.
There has been overwhelming condemnation of the finance minister’s move. “We are concerned about the proposed Budget measure,’’ British Finance Minister George Osborne said after meeting his Indian counterpart on April 2 in Delhi. “Not just because of its impact on one company, Vodafone, but because we think it might damage the overall climate for investment in India,’’ Osborne warned.
(This story appears in the 27 April, 2012 issue of Forbes India. To visit our Archives, click here.)