Trade war loometh?

A financial industry group, SIFMA has released a letter to the US Finance Secretary, Timothy Geithner which says that the Indian Finance Bill " includes two dozen amendments that would retroactively create tax liabilities, some for periods of up to 50 years". WSJ online, March 18. The letter goes on to claim that the amendments " are inconsistent with India's specific obligations to the US under the current bilateral treaty ". This is taken as a hint that companies may go to international arbitration as Vodafone has already threatened to do. The government has already backed down on proposals to levy penalties on Coal India Ltd, if it does not increase output, after objections from The Children's Investment Fund, TCI which owns 1% of CIL shares. Penalties have been reduced to insignificant amounts. In 2008 TCI fought for higher dividend for the 9.9% it owned in Japanese utility, Electric Power Development or J-Power. Eventually TCI had to back down and sold out at a significant loss. But India is not Japan which ran huge trade surpluses based on exports to the US and Europe. India desperately needs foreign investment as the Current Account Deficit is above 4%. Exports grew 21% last year to $303.7 billion, which is better than government forecast of $300 billion, but imports grew 32.1% to $488.6 billion of which oil accounted for $155.6 billion and gold and silver for $61.5 billion. A trade deficit of $188.9 billion. Norwegian telecom company, Telenor wants compensation from the government for its cancelled 2G licence while Russian telecom company, Sistema has invoked bilateral trade treaty between India and Russia to protect its $3.1 billion investment. Sistema may have to take a charge of $1 billion on its books for the cancelled 2G licence. If the government has to defend itself against so many companies at international arbitration it will have to spend hundreds of millions of dollars in legal fees and may end up paying costs if it loses. At the very least the bad publicity will result in a fall of Foreign Direct Investment which the country desperately needs. The government is hoping to raise $90 billion from sale of shares of public sector companies to plug its fiscal deficit but last month government owned Life Insurance Corporation of India had to step in when there were no offers for 5% of Oil and Natural Gas Company. Effectively transferring money from one pocket to another. Criminal politicians and thieving civil servants are so used to extorting money as taxes from the docile Indian public that they think they can treat foreign companies with the same lack of respect. Not true. It may end up being a costly lesson. Trouble is that we will end up paying.