Union finance minister Pranab Mukherjee has said that domestic stock markets have an appetite for more foreign investments as FII inflows were still at moderate levels. He also made it clear that it was not yet time for government intervention to check FII inflows.
Cumulative net FII inflow in equities and debt market till October 1 is pegged at $109 billion, of which $92.03 billion is in equities and $17.28 billion in debt. Net FII inflows since Mr Mukherjee presented his Budget on Februrary 26 is pegged at $26.33 billion, of which $19.02 billion is in equities and $7.33 billion in debt, according to FC Research Bureau data.
The Bombay Stock Exchange’s 30-stock benchmark Sensex index closed at 20,445.04 points when trading ended Friday.
The finance minister, speaking exclusively to Financial Chronicle on the state of the economy on Wednesday, a full seven months since presenting his last Budget and before North Block gears up to start work on the next one five months from now, said when asked if large portfolio inflows were a big concern for him: “We will have to make an assessment about how much of inflows will lead to overheating... we will have to see whether money is coming in for a very short term, medium term or long term. What we know is that countries where safe investments can be made are still in some difficulty, and their recovery process is still not robust.
The recovery is weak in the whole of the euro zone, except Germany and France. North America is also not very strong.” Thus there were few places left for prospective investors to go to other than China, India and emerging Asian economies, the minister said, adding: “So we should not be worried, but keep a watch on the situation and take necessary steps at the right time.”
Asked if the Mumbai high court judgment in the Vodafone case would become the norm for all similar overseas transactions, and if foreign companies would have to pay capital gains tax in India, the finance minister said taxation of capital gains in mergers and acquisitions depended on the facts of each case and the relevant double taxation avoidance agreement (DTAA). He said there had been no shift in government policy in the Vodafone case. “International law accepts that a state may levy tax against persons if their conducts outside its border have consequences within border,” the minister said.
Stating that the Supreme Court verdict would be the final word in the Vodafone case, the minister said he did not feel this would have any adverse impact on foreign investments in India.
Asked if the government hoped to meet its target of raising `40,000 crore from disinvestment of public sector shares, given the buoyant market sentiment, Mr Mukherjee said the target presented in the Budget was indicative, and he would offload the PSU stake “only when I get maximum advantage of market conditions.” He said the government had raised approximately `24,000 crore from five disinvestments in 2009-10, and `2,023 crore so far this year. The fact that the government had already raised a record `106,000 crore from the sale of 3G spectrum had no bearing on future share sale plans, he added.
When asked why the government’s black money chase in overseas tax havens had not yielded much, Mr Mukherjee claimed substantial progress had been made on unearthing information about black money stashed abroad. His ministry had already acted on information provided by the German authorities and concluded assessments in 18 individual cases, raising a total demand of `24.26 crore.
The government had identified 21 countries/jurisdictions for tax information exchange agreements (TIEA), concluded it with the Bahamas, Bermuda, British Virgin Islands, Isle of Man, Jersey, Monaco, the Cayman Islands and Argentina. Active negotiations were in progress with five other jurisdictions, while a response was awaited from six more, the minister said. Two jurisdictions had sought a comprehensive DTAA instead of the TIEA. Active renegotiations were also on with 74 DTAA countries to broaden the scope of the clause on exchange of information. DTAA negotiations had been completed with seven counties, and were still on with 15 others. The government has already revised its DTAA with Switzerland.
Mr Mukherjee said there was little evidence to conclude that black money was fuelling consumption in the domestic market despite high inflation and food prices. He said the government had put money in the hands of the people through successive salary and dearness allowance revisions for its employees, as well as higher spending through NREGS. It was likely that more money in the hands of ordinary Indians had a bearing on consumption, he said.
The finance minister, agreeing that the overall state of the economy was quite satisfactory, noted that there were some areas of concern, particularly inflationary pressures and high food prices. In this context, he said the subsidy on foodgrain production and consumption could not be wished away would continue to be a priority to establish food security for the country’s 1.18 billion people. Mr Mukherjee felt inflation should stabilise at moderate levels by the yearend and the economy should clock a 8.5 per cent growth rate.