September 22, 2020

Cayman Islands deals within more deals


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What connects an acquisition in the Cayman Islands, falling sales of Honda City cars and a new airport in the Delhi metropolitan area? That may resemble a Freakonomics question, but is actually revealing of a fundamental ailment of the Indian economy. Policy is so unpredictable here that investment decisions and bets on the future are not standard risks but blind gambles.

To overcome them, companies either under-invest in capacities or over-charge consumers, often both. This makes India a perennial shortage economy and, despite the boundless domestic demand, also an expensive one.

Consider these three examples. In his budget speech of March 16, the finance minister famously introduced legislation aimed at imposing a retroactive tax penalty of R11,000 crore on Vodafone. Five years ago, Vodafone’s Netherlands subsidiary bought Hutchison’s Cayman Islands subsidiary for $11 billion, leading to a change in ownership of India’s second-largest telecom company. The deal had no tax liability in India. The government wants to change that.

The retroactive tax has been much discussed. Foreign governments and businesses have criticised it and called for “predictability” in India’s tax laws and policies.

A ‘predictable’ economic-policy regime is extremely welcome. It insulates investors from shocks. It allows them to take a long view, put their money incrementally and make steady – though not necessarily windfall – returns. It gives the ecosystem stability.

However, is such ‘predictability’ only the privilege of foreign investors? What of domestic stakeholders, ordinary, middle class citizens and those companies – substantially Indian-owned – already in India?

Till about a year ago, Honda City was among India’s best-selling cars. Today its sales have collapsed. The reason is simple enough: it has no diesel variant. The difference between diesel and petrol prices is roughly R30 a litre in Delhi. Various factors – fear of losing votes, populism – have led to the Union government not increasing energy prices. Some correction has been made with petrol, but diesel is still hugely subsidised.

This has created a distortion in the market. People have stopped buying petrol cars. Automobile companies are now talking of investing in new diesel engine plants.

Behind the talk, everybody is confused. At some point the differential between diesel and petrol prices will have to become realistic. Will the government do it in two years or five or 10? Nobody knows. With no clarity, automobile company executives confess they don’t how much to invest in new diesel engine capacities and whether to write off current petrol engine capacities or just wait it out.

To add to the mess, the petroleum minister has argued that instead of rationalising diesel prices, buyers of diesel cars should pay a hefty purchase tax. The quantum of tax has apparently been calculated taking into account savings for an average car owner over a period of 10 years.

What happens to a person who buys a diesel car, pays this entry-level tax and then finds the government has significantly raised diesel prices in the life-cycle of the car, over five or seven years? Don’t his calculations go awry? Is it fair to leave him – or the entire automobile industry, one of the few manufacturing industries in which India is globally competitive – vulnerable to such unpredictability?

Take the final example. In the early 1990s, someone came up with the idea of a second airport to serve Delhi, to be located in Greater Noida in western Uttar Pradesh. Gradually Jewar town, on the outskirts of Greater Noida, was identified as a location. The proposal has been pending for a decade. When it came to office in 2007, the Mayawati government pushed it.

Rivalry between the Congress and the BSP took its toll. The Union government kept delaying clearance. The plan was buried in an ocean of committees and feasibility studies. Now the Akhilesh Yadav government has junked the old blueprint and pitched for a new airport in Mathura district.

An airport does not come up in a day. It incubates a community, businesses that use and service it, townships and residential developments that thrive off it. Over a decade, airport-inspired investments have taken place in the Jewar belt, at the intersection of Greater Noida, Bulandshahr and Aligarh. Now the process will be replicated in Mathura.

Admittedly, not all of this investment is well-intentioned. Much of it is speculation, some of it linked to crony capitalists taking positions on the basis of insider information. This was true of friends of the previous government in Lucknow, and will be true of friends of the new government as well.

As such, there will be lots of land deals, real estate prices will zoom, brochures to sell plots and flats will be printed and money collected from everybody who wants to climb on to the gravy train – including end users and completely honest folk only looking to make a good investment.

Eventually, there may be no airport at all. The decision may be postponed to another decade. What about those left with a loan to repay for a flat in an airport city that doesn’t exist? What about an employee in an auto ancillaries company that makes petrol engines but finds its future a mystery? They’re not as high-profile as Vodafone’s tax consultants, but surely they too deserve a slice of ‘predictability’?

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