If the Indian government looks as if it’s in a spiral of never-ending crises, come to London (where I am this week) and have a look at Britain’s maladministration headed by David Cameron.
A UK “diplomatic” (actually MI6 spies) mission to woo Libyan rebels arrived unexpectedly one night last week by helicopter and was instantly arrested. There is a royal crisis over Prince Andrew, Britain’s roving trade ambassador’s links with a paedophile and call girls, which are being splashed across the front pages, with Cameron’s Downing Street public relations machine contradicting its own briefings on whether the prince should lose his trade job.
And – of special relevance for this blog – a badly planned letter that Cameron wrote last month to Manmohan Singh moaning about the Indian government’s lack of commercial transparency has been leaked in India this week, which means it will probably be doing more harm than good.
All that should have led to interesting conversations this evening at the British High Commissioner’s annual Queen’s Birthday Party on the lawns of his Delhi residence that was attended a year or two ago by Prince Andrew.
Last July, when Cameron visited India with an over-large posse of six cabinet ministers and accompanying businessmen and academics, I suggested on this blog that Britain was punching above its weight. The current (peaceful) gun boat diplomacy of the Libya helicoptered emissaries and the letter to Manmohan Singh shows again that the UK is getting its diplomacy wrong and expecting too much, given the country’s declining economic importance.
Whoever advised Cameron to send the letter last month does not understand that the best way to score goals with the Indian government is not to send gripes and warnings of declining trade ties. Most other countries seem to accept this, which makes it even sillier for Britain to send such letters.
The letter listed three cases:- a $2.5bn tax demand against Vodafone’s mobile phone business; delayed regulatory approval for the $9.6bn sale by Cairn Energy of its Indian natural gas fields to Vedanta (an Indian-controlled UK-listed company) that might soon be cleared; and late payment for work done by British companies at last November’s Commonwealth Games. Such problems risked “affecting the wider business climate” warned the British prime minister, who implicitly complained about India’s lack of “transparency in the business environment”.
‘Not done old chap’
There is a telling editorial in today’s pro-Congress government Hindustan Times newspaper mocking Britain under the headline “Not done, Old Chap”. It uses cricketing metaphors to chime with the current World Cup and notes that “Britain doesn’t happen to be among India’s top ten trading partners,” saying:
“It’s not cricket, British prime minister David Cameron has told India while the game’s greatest spectacle is underway here in the old colony. British lads Cairn and Vodafone – and sterling fellows too – are playing on a queer pitch in the subcontinent, the Conservative resident of 10 Downing Street has written to Manmohan Singh. The umpiring isn’t up to scratch. Energy company Cairn is being bowled a bodyline every second delivery and nobody seems to notice. Before that, telecom company Vodafone was declared leg before wicket when it obviously wasn’t. Gentlemen don’t use tax googlies and regulatory bouncers on the Oval! Surely, good chaps don’t get too nosy about details like tax dodges and unpaid royalties, do they?”
Those words were not very eloquently crafted, but they make the point.
Vodafone’s $2.5bn tax demand stems from its $11bn purchase in 2007, through offshore tax havens, of a Hong Kong-held controlling stake in what was then the Hutchison-Essar mobile phone business. It is widely believed, based on circumstantial evidence, that this demand was initiated by the finance ministry with encouragement from a rival Indian telecom company boss, who had good political connections in the ministry. This allegedly led tax collectors to find a novel interpretation of regulations, which then led to Vodafone being told it should have set aside $2-2.5bn that Hutchison owed as corporate gains tax. This is now going very slowly through the Indian courts, with the next hearing due in July.
Cameron’s appeal on Vodafone’s behalf is just the latest of a series of unsuccessful bids for help. Early on, the company appealed to the Prime Minister’s Office (PMO) in Delhi, and then sought redress from India’s Supreme Court. These moves however seemed merely to make the finance ministry and its tax collectors even more determined to win. Expecting the PMO to step into a court case, is scarcely sensible – nor were warnings issued by Vodafone’s ceo, Vittorio Colao, in two Indian newspaper interviews last October that the case was having a negative impact on foreign investment (though curiously he also said at the same time that he planned to invest more!).
Colao said the tax case offered “an opportunity for India to reverse its position and assure global investors that it will not offer them an unfriendly and unpredictable environment”. But no-one in India took any notice, and court hearings have been delayed for much longer than had been expected. Perhaps Vodafone hoped the government law officers would be advised to go soft on the case. Such advice can apparently sometimes be issued, but it is not likely, I am told, on a highly technical tax case – and certainly not when there is the prospect of $2bn or more landing in the government’s kitty.
One can feel sorry for Vodafone. It genuinely had no idea that it should have set the tax aside, and it argues that it should not be forced to pay for what it sees as a retrospective change of tax policy. The government says it is not a change of policy, but a new legal interpretation of existing regulations. Either way, Vodafone has done itself no favours with its legal bids and hollow investment threats.
Cairn and Vedanta
Vedanta, a rapidly emerging and relatively new international metals group, has been facing a myriad of mining regulatory blockages on major Indian projects, as well as opposition to the buy-out of Scotland-based Cairn Energy’s Indian gas field business. It shares a dreadful reputation for corporate ethics and environmental reputation that its Indian sister company, Sterlite, has had for a decade or more.
Cairn, by contrast, has operated in India successfully and without much fuss or trouble since 1996, when it bought an Australian company’s exploration rights. So I was amazed when Cairn announced it had chosen to sell control to such an accident-prone company as Vedanta, though apparently the $9.6bn offer was too good to be turned down.
It was however inevitable that the sale would arouse behind-the-scenes opposition from three different areas – foreign metals companies that wanted to curb Vedanta’s growth, at least one of India’s big family groups with similar motivations, and other Indian public sector oil interests, including ONGC, the government-owned oil and gas company, that claimed pre-emptive rights to the Cairn shares and raised other issues.
Cairn also appealed to the PMO for help, and did not receive much encouragement, though it is now expected that the Indian cabinet might clear the deal this week or next – subject to important qualifications on contentious issues including payment of royalties. That was however going to happen anyway around this time, and seems to owe little if anything to the Cameron letter.
There has been a decline in foreign investment into India, and the country’s international image is slipping, as I argued here last week. Despite what the companies have been saying however, that has been caused not by the Vodafone and Cairn problems, but by a spate of big corruption cases and examples of poor governance. It is also beginning to look as if the combination of Sonia Gandhi, leader of the Congress Party, and Manmohan Singh, the prime minister, is not working effectively at the top of the coalition government.
But these are different issues and do not in any way justify a Cameron-style letter. Indeed, when the Indian government is being hit almost daily by stories revealing an appalling lack of transparency, it was scarcely tactful of Cameron to goad the government with a transparency-based letter.
The British government needs to realise that, though there are close emotional as well as economic ties binding India and the UK together, they only work to the UK’s advantage if it does not throw its weight around.