A couple of unconnected things are throwing dark shadows over this dream run that Foreign Direct Investment into the Indian economy has been having. One, the Income Tax department’s claim on Vodafone for $2.5 B related to its acquisition of a controlling stake in Hutchison Essar. Two, the Andhra government’s crusade against the microfinance industry.
In both cases, the governments (central and Andhra) have good reason to act as they are. In the Vodafone case, there are grey areas when it comes to one offshore entity selling off a stake in an Indian company to another offshore entity. The microfinance industry has been charging rates on loans which become debt traps for poor villagers. Perhaps some regulation is in order.
But the way this is being done creates problems. When you change the rules of the game after investments have been made, future investors worry about making investments. FDI is the good sort of investment. It doesn’t turn tail and run when the markets are down. But if we are to encourage it, we have to take the regulatory uncertainty out.