Corporate India is not happy with capital control restrictions imposed by the Reserve Bank of India (RBI) on investments abroad, saying the Indian economy is going back to the '80s when investments by Indian companies abroad were almost zero - thanks to the stifling capital controls.
Chief excutive officers (CEOs) said they were aware of the situation on the current account deficit (CAD) front, prompting the RBI to impose a cap on outward investment but added the capital control moves would be a dampener to India's global aspirations. A host of Indian companies, including the Tatas, the Birlas, the Mahindras and the Ruias of Essar made acquisitions abroad in the last five years to grow their businesses. "It is ironic that we have controls on capital on Independence Day. Feels like the 1980s. Well, the silver lining is that I feel young again," Anand Mahindra, chairman, Mahindra & Mahindra, tweeted. In fact, in June this year, Delhi-based Apollo Tyres announced it would take over US-based Cooper Tires for $2.5 bn.
The Birlas announced they would invest another $1 billion in the US in a fertiliser unit and another $1bn in Novelis in Latin America. But the CEOs fear the panicky measures announced by RBI on Wednesday to restrict how much Indians and companies can invest abroad would further scare away investors.
"RBI's step to contain the current account deficit by imposing a cap on outward investment acts against the Indian economy's globalisation drive and detracts from the overall reforms process," said Kris Gopalakrishnan, executive vice-chairman of Infosys and president of Confederation of Indian Industry (CII). "We are deeply concerned such a measure would also prove counter-productive as it would disrupt the ongoing investment plans of corporates," Gopalakrishnan said. He added the move would further vitiate investor confidence, which is already low, and would send a wrong signal India was not a place for doing business. The long-term credibility of the country, too, would suffer, as foreign businesses might have doubts about policy stability.
According to the CII President, to stabilise the rupee, it would be appropriate to initiate policies which prevent the influx of non-essential imports such as coal and iron ore and augment forex inflows by encouraging foreign direct investment by promising a conducive and stable policy regime and liberalising foreign institutional investment by removing short-term capital gains tax.
It is hoped the above measures would be temporary and the caps on overseas investment would be removed sooner rather than later, said Gopalakrishnan.
Naina Lal Kidwai, HSBC India head, said the markets on Friday experienced a free fall and hade not reacted well to the central bank's restrictions on rupee flows offshore, with heightened fears that more restrictions might come, including for foreign institutional investors. "These fears need to be addressed - after all, India has never restricted dividend flows offshore or indeed sales of equity share proceeds even when the situation was more dire. The fall in the rupee essentially underlines weakness in the economic fundamentals," Kidwai, who is also head of Federation of Indian Chambers of Commerce and Industry, said.
"We would want to reiterate that the current depreciation is more symptomatic in nature. We hope the recent liquidity tightening measures and rupee outflow restrictions announced by the RBI and the ministry of finance are temporary and would be reversed once we are on firm ground. At this juncture, instilling confidence among investors should be the most important task at hand," Kidwai said.