Economy is sound, let's push reforms, says Economic Survey

Economy is sound, let's push reforms, says Economic Survey
Business Standard, July 3, 2009, Page 1

BS Reporter / New Delhi

Painting a picture of a resilient economy, the pre-Budget Economic Survey 2008-09, tabled in Parliament today by Finance Minister Pranab Mukherjee, said India could grow up to 7.75 per cent in 2009-10, up from 6.7 per cent in 2008-09, provided the global economy, particularly the United States, bottomed out by September and the government was able to push the button on significant economic policy reforms.

The World Bank had recently said India would grow 8.1 per cent in 2010, ahead of China (7.5 per cent). The numbers in the survey also suggest India is finally ready to rub shoulders with its northern neighbour.

The economy, according to the survey, can count among its strengths the large services sector which has historically been less affected by cyclical downturns than manufacturing, a strong farm sector, robust savings rate, ambitious infrastructure development programme and upbeat foreign investors. The "shock absorbers of the economy," it said, were the sound banking system, large foreign exchange reserves, a comfortable external debt position and low inflation. It listed as concerns the dip in growth of private consumption and gross capital formation and said the downside risks were the reduced availability of risk capital, lower capital inflows and delayed revival of the OECD economies.

In keeping with the resurgent mood, the survey listed an ambitious reform agenda for the government, a clear signal that it was no longer weighed down by the Communist parties. Surcharges, cesses and new taxes like commodity transaction tax, securities transaction tax, fringe benefit tax and dividend distribution tax had reversed the move towards a simpler tax system, it said. The first three of these taxes were introduced by Mukherjee’s predecessor, P Chidambaram (2004-08). High government-administered interest rates on small savings, it added, had kept lending rates from coming down.

Reflecting the new-found boldness of the Manmohan Singh government, the survey made some radical suggestions like restricting the cooking gas subsidy to six or eight cylinders for a family every year, auction of freely tradable 3G spectrum for next-generation mobile telephone services, raising foreign investment in defence to 49 per cent, opening up multi-brand retail, restricting price control to drugs with just five or six players, relaxing the contract labour laws and permitting retrenchment of workers by companies without prior permission.

It conceded that the return to the path of fiscal correction could occur next year with a fiscal deficit target of three per cent of GDP by 2010-11, mobilisation of at least Rs 25,000 crore through disinvestment, de-control of petrol and diesel prices as well as sugar and fertiliser industries, opening coal mining for the private sector and reform of pension, insurance and retail sectors.

"These reforms should be implemented over the next four to five years, which will take the country back on trend of growth," said Arvind Virmani, chief economic advisor in the ministry of finance. These, however, are just a wish list of the finance ministry and may not be implemented in full by the government.

To balance the interests of farmers and consumers, the survey suggested that there should be a domestic price band for agricultural commodities within which imports and exports are freely allowed. If the international price threatens to exceed the brand, export restrictions and lower import duties would kick in and vice-versa. To rein in the fuel subsidy, it suggested temporarily taxing upstream crude oil producers. (This demand was made last year by the Samajwadi Party at the height of the crude oil crisis.)

The survey suggested that the indirect taxes, that were reduced in the recent part as part of fiscal stimulus package, could be restored once the economy is back on track. “The approach of the government has been to use a mix of fiscal measures including reduction in indirect which could be reversed subsequently,” it said.

In the last financial year, 2008-09, the government had cut peak excise duty rate in two tranches from 14 to 8 per cent and service tax from 12 to 10 per cent.

In spite of the optimistic projections, the survey raised doubts about the global economy, especially the “green shoots” of recent commodity price rises. According to the survey, this could be “a result of position-taking by financial investors, seeking to benefit from global recovery expectations due to the large fiscal and monetary stimulus and/or to hedge against inflation risk in the United States due to the massive quantitative easing.”

WHAT NORTH BLOCK WANTS Some key policy prescriptions

For fiscal stability, simplicity

* Limit LPG subsidy to 6 to 8 cylinders a year per household
* Limit kerosene subsidy by ensuring that every rural household has a solar cooker and lantern
* Convert fertiliser subsidy to user nutrient-related subsidy
* Revitalise disinvestment programme to raise at least Rs 25,000 crore a year
* Rationalise dividend distribution tax
* Phase out surcharges, cesses and transaction taxes such as securities transaction tax, fringe benefit tax
* Auction 3G spectrum and allow it to be freely traded

For financial markets

* All financial market regulation under Sebi
* Allow high net worth individuals to invest directly in the markets
* Set up centralised debt management office
* Align voting rights in banks with equity holdings
* Phased increase in FDI in banks

For energy efficiency

* Decontrol petrol and diesel prices
* De-nationalise coal to allow private entry
* Sell oil fields to private sector

For business

* Raise FDI limit in insurance, defence, allow it n multi-format retailing
* Allow private entry into the provision of passenger train/railway services
* Remove need for prior government permission to retrench workers but raise compensation requirements
* Ease contract labour laws Amend Factories Act to increase workweek to 60 hours from 48 hours