TAX NEWS - JUNE 2010

Global Bank Tax: India reveals its hand on a global bank tax

by James Lamont, 04 June 2010 -- India has kept its hand well hidden at the table of the G20's deliberations over how to prevent another global financial crisis. So the acknowledgement by Pranab Mukherjee, the country's finance minister, that a bank tax is no alternative to better regulation is illuminating.

Senior Indian policymakers have been non-committal about International Monetary Fund-backed proposals for a global banking tax. They were similarly muted when Gordon Brown, the former UK prime minister, claimed to have gained wide support among the G20 countries for a global banking tax to fund future bail outs. The UK Treasury was seeking out India as a key ally.

Part of the reason for India's reticence is that it experienced the financial crisis very differently from the west, and even some of its Asian peers. India's banks suffered no threat of collapse, nor earned a reputation for excessive risk or returns. Policymakers are confident of India's own prudent regulation. They are less sure of regulation elsewhere.

Unlike Washington and London, New Delhi's sentiments are against increasing the tax burden on India's largely state-owned banking system at a time when financial inclusion of the country's tens of millions is a top priority.

Mukerjee has now made this clear.

In an interview, published today in the daily Economic Times, the finance minister says: "I do believe instead of taxation there should be better regulation. Taxation is not an alternative."

Although India has steered clear of public debate of a global bank levy, the Reserve Bank of India has expressed its intention to issue guidelines on the pay of senior foreign bank executives in India. Some policy advisers have recommended closer scrutiny of foreign banks operating in India, arguing that they weak regulation elsewhere threatens to disadvantage Indian depositors.

The finance ministry and RBI shouldn't, however, be too self-congratulatory. Stephen Roach, the chairman of Morgan Stanley Asia, has given them both a sharp dig in the ribs by telling an Indian TV network that with India's economy growing at 8.6 per cent in the quarter to the end of March, fiscal and monetary stimulus is "outlived".

"Your economy is growing so rapidly you do not need to leave your policy settings at the emergency levels," he warned.

For all that good regulation, the triple-peril of property bubbles, bad bank credit and inflation grow once again.