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India's characteristic brand of governmental inertia

Kitty Miv, Editor
12 February, 2015

Kitty's Kountry Rankings are below, with a description of how they are kompiled. This week, as every week, I give out Encomiums to countries which have done Good Things, and award Execrations for countries which according to my highly personal and partial views have done Bad Things.

It's been a long time in coming, but at last some good news from India. The BJP Government, which replaced the Congress Party last year, has consistently talked of the need to stabilize the legal and tax framework, to remove bureaucratic roadblocks to investment, liberalize foreign investment laws and rein in its tax inspectors. Worryingly though, as the months wore on, it seemed that India's characteristic brand of governmental inertia was beginning to grip Nahrendra Modi's administration, as it had done so tightly with its predecessor. The former Government also talked a lot about how India's business environment must be made more welcoming to foreign investors, but its missives on the subject were rarely able to penetrate an intensely bureaucratic administrative machine and reach the parts that they were supposed to reach. Fresh from electoral victory, Finance Minister Arun Jaitley's first Budget was a cautious affair, and the business community must have been exasperated at his failure to reverse the former Government's retrospective tax measure, which takes most of the credit for destroying India's reputation with foreign investors. A growing list of multi-billion dollar tax disputes with multinationals also continued to drag on towards the end of the year, unresolved. The formation of yet another high-level committee to advise on the uncluttering of the tax system was also not exactly encouraging, given their history of achieving pretty much nothing. But a major breakthrough did seem to arrive in late January, when it was reported that tax officials had been told not to appeal a court ruling made in favor of Vodafone last year, a decision which is expected to lead to the dropping of more than 20 similar cases; it was swiftly followed by the dismissal of the tax department's case against Shell. At around the same time, Jaitley told a conference of tax officials that it was time for them to stop being so adversarial in their pursuit of tax. Perhaps this time the message is really getting through? It is hard to quantify to what extent FDI into India has been affected by Government policy in recent years. However, according to UNCTAD, FDI shot up by 25 percent in 2014, which offers some sort of clue as to what investors think of the new Government, and, of course, the old one. Indeed, in a recent interview with India's Economic Times, Gita Gopinath, a Harvard economics professor, claimed that perceptions about India have changed "dramatically" and that there is now a "great deal of confidence" among investors. Nonetheless there is still much to do. Perhaps if the Government can finally convince the states to adopt the long-awaited, bewhiskered GST, people will begin to believe that India is capable of real change. We shall have to wait and see.

If things are looking up for India, Australia seems to be getting itself into a right old mess. I'm reminded of the time I read in the British press that when the new Coalition took over from the departing Labour Government in 2010, Treasury Minister Liam Byrne left a succinct note to his successor David Laws which summarized the UK's predicament in a very simple, but brutally honest, way: "Dear Chief Secretary, I'm afraid there is no money." I think it was meant humorously, a characteristically dry piece of British gallows humor if you like. But it didn't go down too well with the new Government. As far as I know, Australia's outgoing Labor administration left no such notes for Australia's incoming conservative coalition. That's probably because they didn't need to. Former Treasurer Wayne Swan had already laid bare the dire state of the public finances a few months before the 2013 election. And Prime Minister Tony Abbott isn't finding it funny either. Australia is known as the "lucky country." But Abbott must be one of the unluckiest Prime Ministers in recent history. Labor had long since squandered the proceeds of what it was pleased to call "mining boom mark II," and now that China no longer buys Australia's abundant minerals in such vast quantities, Abbott and his Treasurer Joe Hockey find themselves fighting fires all around without the aid of a hose, or indeed any water to go in it. It seems as if tax revenue forecasts are being revised down on an almost monthly basis – the recent mid-year fiscal outlook predicted that tax receipts would fall by UAD32bn over four years. And on February 3, Hockey admitted that the Government still spends AUD100m more per day than it receives in tax. While the Coalition wants to get spending down, it is forced into compromises with tiny parties like Palmer United, which, with its three members, holds the balance of power in the Senate. Publicly, Hockey is clinging to the belief that he won't have to raise taxes and can still afford to cut them. That is admirable, but he must know that the numbers don't add up. A 1.5 percent corporate tax cut for small business is scheduled for July. But I wouldn't be surprised if that gets quietly shelved. Not that I think tax hikes are a good thing, just that Australia might not be able to avoid more of them, after imposing the so-called Budget Repair Levy on high incomes last year. Meanwhile, Abbott himself is clinging on, as Liberal Party dissenters unhappy at his handling of things prepare a leadership challenge. Abbott hasn't been a complete hostage to fortune: politicians don't become unpopular by accident. Still, he needs his luck to change somehow if he's going to survive.

Perhaps Abbott should have been born Canadian, for they seem to have all the answers. It has been well documented how Canada was the only one of the major industrialized countries which didn't suffer a banking crisis. In fact, the British were so impressed at the way things were run there that they head-hunted Canada's top central banker, Mark Carney, and put him in charge of the Bank of England. While the recession which followed the financial crisis didn't leave Canada unblemished, and much was spent in stimulating the economy, requiring the federal Government to run a deficit, Canada still managed to cut its corporate tax to the lowest level in the G8. Now it expects to achieve a balanced budget in 2015/16, having recorded a budget surplus in November 2014. There is one worry for the Government though: oil. Canada is a major producer of oil and natural gas, and like any other nation, it likes to takes its cut from the companies that extract it from Canadian soil, as do the provincial Governments. Senior figures in the federal Government, including Prime Minister Stephen Harper, have repeatedly taken to the airwaves recently to confirm that the budget will still balance on time despite falling revenues linked to the cheaper price of oil on global markets. But it's not just the federal Government this affects. At least two provincial Governments have been weighing up new tax increases to offset dwindling oil revenues, the latest being Alberta, which has however said it won't go ahead with a proposal to increase the provincial corporate tax. For now at least. These are developments worth watching though, and one does fear that the federal Government doth protest too much. With a general election scheduled for October appearing on the horizon, let's hope it's not hiding any nasty secrets from its citizens.

 

Kitty's Encomiums and Execrations

Methodology: each week (this is the 143rd) one or more countries are given encomiums and one or more are given execrations. Those are the entries below with descriptive links. In the following week, each encomium counts as + 1 for that country, and each execration counts as – 1, being added to that country's existing score. Over time, therefore, a ranking will build up for each country, and further countries will join the listing. Germany is at minus 2, since in the second week it had an execration and in the first week it had an encomium, leaving it at neutral; then it had an execration in week four, thus dropping to – 1, and another one in week six, dropping to – 2; finally in week 13 it got something right, so it went back up to – 1; then in week 16 it gained a further star, so then it was in neutral territory until week 23 when it dropped back to minus one, but reverting to neutral territory in the following week, then dropping to minus one in week 50, and back up to plus one in week 51, then to plus two in week 52. Some weeks ago it dropped a place, but then quickly recovered one step. Etc etc.

The rankings are intended to be a proxy for business friendliness; evidently they are highly partisan, but as time goes by they are becoming useful for decision-making. For any country in negative territory, you should think carefully before starting a business there.

Kitty's Encomiums:

Canada prudent

India acts

And Kitty's Execrations:

Australia spent

Ciao

Kitty



About the Author


Kitty Miv, Editor

Kitty was born in Argentina in 1960 to a Scottish cattle rancher and his Argentine wife. Educated in Edinburgh and at Princeton, Kitty worked for the World Bank as an economist, where she met and married an emigre Iranian banker. During her time with the Bank, Kitty worked in a number of emerging markets, including a spell in the ex-USSR as a Transition Economies Team Leader. Kitty is now a consultant in Brussels and has free-lance writing relationships with a number of prominent economic publications. kitty@lowtax.net

 

 

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