S. Sethuraman
After the initial bravado, UPA-II seems to be settling down to putting through relatively more doable measures to tide over a near-crisis situation in the economy, which it had first under-played attributing it to global uncertainty but later magnified to warrant a brash decision on FDI in multi-brand retail sector along with a diesel price hike. These are still less than half-steps to unleash the ‘animal spirits’ of investors on which UPA had long relied to flaunt India’s fast growth of recent years.
The road ahead will be difficult and full of multiple challenges before India can hope to return to its potential of 7.5 to 8 per cent growth. This only underlines the extent of neglect of emerging economic fundamentals over the last 18 months, with unabated inflation simply overlooked and structural deficiencies allowed to worsen further. Meanwhile, fiscal and current deficits were rising, the rupee depreciating continuously till lately, while industry stagnated.
It is true UPA-II has had to do political fire-fighting with a deluge of scams heaped on it, rightly or wrongly, by an irresponsible opposition. The FDI in retail decision and fuel subsidy cuts may have edged out the BJP noise over “coal-scam” but provided a handle to all forces arrayed against UPA-II from which a furious TMC Chief Ms. Mamata Banerjee, walked out, launching a tirade against PM and UPA-II.
Taking the battle to New Delhi streets and other states, the West Bengal leader hopes to galvanise regional party leaders opposed to the entry of foreign firms including the remaining UPA ally DMK, for a Parliamentary challenge during the winter session. Amid enveloping tensions and pre-election jockeying by parties, all and sundry, the UPA Government remains confident of riding out the storm – even if a trust vote is forced upon it – and persevering on its chosen path of bringing about a strong revival of economic growth for which a judicious road-map has been laid out by the Finance Minister Mr P Chidambaram.
Government’s expectations that its latest reform initiatives would improve market sentiment and generate business confidence afresh have not been in vain, if the stock exchange is any guide, but investors, domestic and foreign, who have shared the perception of a “policy paralysis” in New Delhi, now await the rolling out of more concrete steps envisaged by the Finance Minister Mr P Chidambaram to restore growth momentum.
These include fiscal consolidation, tax and other incentives to revive savings and investments – (as he has already outlined to an extent in the case of mutual fund industry and insurance), tax clarity and project implementation. Even so, there is some scepticism on the part of global rating agencies, perhaps looking at the state of polity. The Standard & Poor’s has lowered GDP estimate for fiscal 2013 to 5.5 per cent while Moody’s think whatever has been done would not by itself help to improve sovereign credit profile.
And critical issues of land, food security and financial sector reforms remain to be tackled along with the Goods and Service Tax, which is still under negotiation with the states. The BJP, having paralysed the monsoon session of Parliament, is in no mood to resume the role of a responsible opposition and its totally negative approach is based on a perception of UPA’s inability to last its term till 2014. How far UPA-II can manage to push through at least some of the urgent legislation for the economy, with support of parties outside NDA remains to be seen.
Unfortunately, everything that Government is seeking to do now by way of damage control is being invested with the aura of reform whereas it would be making up for ground lost through lack of efficient governance in the first place. Mr Chidambaram himself has noted that sound policies and good governance are needed to overcome the challenges. But what had been lacking over the last few years was serious attention to strengthening supply side responses, which would been supportive of growth with a moderating impact on India’s uncontrolled inflation.
Expectations of a further dose of major reforms had been aroused by the determined tone of Prime Minister Manmohan Singh that reforms are not a one-off process and would be taken to their next stages. The Congress Party has fully backed the Prime Minister’s reform path at a time the BJP-led opposition is wholly preoccupied with raising its voice against anything that Government proposes. For the Congress, food security has become paramount in the context of next elections.
Reforms like opening up of opening up of financial sector such as banking and insurance with a higher FDI cap than the 26 per cent already proposed and removal of irritants in tax policies would all need legislative approvals. These would involve a certain degree of political consensus among UPA and its allies, DMK and NCP, though Mr Karunanidhi seems to be averse to back any reform. Thus, UPA has to count as much as on parties like SP and BSP whose support may be more issue-based.
Politically, UPA-II does not seem to be at immediate risk of loss of majority leading to election earlier than the summer of 2014. Neither BJP nor regional parties, major and minor, seem willing to take initiatives for a no-confidence vote at this stage. This certainly gives UPA-II some latitude to push ahead with feasible policy changes. It is here that Mr Chidambaram’s road-map with some flexibility can become operative so that Government does not get entrapped on any issue in the pre-election period.
Accordingly, the Finance Minister would unveil his version of fiscal consolidation path, modifying the “swift correction” implicit in the Kelkar Panel recommendations. Secondly, the other major move, of greater significance for foreign investors, is a package of changes for greater clarity in the application of tax laws for foreign investors in the light of proposals made by the Parthasarathy Shome Committee.
This could cover waiver of interest and penalty where tax is collected retrospectively from foreign firms like Vodafone. GAAR (General Anti Avoidance Rule) may be deferred for three years, instead of one as proposed in the Budget by the then Finance Minister Mr Pranab Mukherjee.
Government at this stage seems to have decided to keep subsidy reduction on a lower key, and in publishing the Kelkar Report for public comments, the Finance Ministry made no secret of UPA’s commitment to protect its social and economic objectives while taking fiscal consolidation forward. It would no doubt be too willing to act upon many other recommendations of the Kelkar Panel calculated to improve public finances over the medium term including accelerated disinvestment in select public undertakings in the current year to achieve the budgeted rs.30,000 crores. Meanwhile, cash-rich PSUs have also been asked not to slip up in their capital expenditure plans, failing which they would be required to surrender cash to government through bigger dividends.
Measures already rolled out by the Finance Ministry relate to an equity savings scheme with tax benefits for new investors upto Rs. 50,000, reduction in withholding tax on overseas borrowings from 20 to 5 per cent, keeping in view the need to attract dollar flows, given the imperative of bridging current account deficits. Other steps are to induce more people to invest in mutual funds and tax sops for insurance companies to encourage individuals to buy life covers along with procedural refinements to enable insurance companies invest in debt funds of special purpose vehicles floated for infrastructure building.
A key area where the Finance Minister is currently focused is on project implementation and has proposed a National Investment Board under the chairmanship of Prime Minister as the final authority to clear all projects above Rs.1,000 crores so that these do not get stranded in individual ministries for regulatory, environmental and other clearances. If the Government could bring about a quick solution for the festering problems in coal-power sectors, it would mark a major advance on less controversial Track II reforms. (IPA)
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