The growth drivers

Last Updated: Sun, Dec 30, 2012 06:20 hrs

Set to grow at a decadal low this year, the Indian economy needs a strong (and possibly continued) dose of policy reform. It expanded by 5.4 per cent in the first half, and a rate less than 6.5 per cent for this financial year would be a 10-year bottom.

Credited with steering India out of its worst-ever balance of payments crisis in 1991 as the then finance minister, Prime Minister Manmohan Singh is expected to lift the economy to a path of sustained high growth, which he has sworn to do. Arvind Panigariya, professor of economics at Columbia University, believes the Congress-led United Progressive Alliance (UPA) coalition interpreted the 2004 Lok Sabha poll outcome as a vote against reform measures. So, there was a singular focus on redistribution and enhanced public expenditure. A realisation since, that without growth, the revenue it needs to finance its ever-expanding social programmes was not guaranteed, has led to a re-focus on reforms, he says.

Hence, the renewed priority to pro-market reforms. There have been the liberalisation of foreign direct investment (FDI) limits in retailing, a Cabinet Committee on Investment to fast-track approvals, a new investment policy for urea and a decision on various contentious changes to the land acquisition laws. The prime minister is to take a call on two important taxation issues, the General Anti-Avoidance Rules (GAAR) and retrospective amendments to the Income Tax Act. Reports on both, prepared by a panel headed by noted tax expert Parthasarathi Shome, are with his office. So is a report on steps to create an environment of stability for investors, needed badly to spur economic growth.

The Cabinet Committee on Economic Affairs, chaired by the PM, would also have to decide on raising the retail prices of diesel and kerosene. The petroleum ministry has proposed to increase both. Fuel price corrections are needed to adhere to the fiscal road map announced by Finance Minister P Chidambaram. This schedule, if not adhered to, could lead to downgrading of our sovereign ratings, deterring investors from putting their money in India.

As the next Budget would be the last one before the general elections, there is always a fear that it would throw the promised fiscal consolidation out of gear. Since the finance minister talked of bitter medicine for the economy to achieve fiscal correction, it is to be seen how he would strike a balance between party pressure to allocate funds for the proposed food security law, for instance, and the needs of public finance. As he raises spending on food subsidy, he would have to undertake expenditure and subsidy reforms.

Naresh Takkar, head of rating agency Icra, says the macro economic fundamentals would benefit from a focus on fiscal consolidation, particularly expenditure reform, which would restrain government borrowings and ensure the private sector does not get crowded out. In this respect, the Direct Taxes Code is awaited, as it is expected to remove or restructure lots of tax exemptions. However, it is highly unlikely to come before April.

One of the many awaited reforms is in the financial sector - new banking licences, raising FDI in private insurance, the pension reforms Bill. Recently, Parliament passed a bill on banking regulation, wanted by the Reserve Bank of India (RBI) before it issued any new banking licence. The next financial year will assess Chidambaram's dexterity in persuading opposition parties to help the government pass the awaited measures.

The role of RBI Governor D Subbarao assumes significance now in issuing final guidelines on fresh banking licences which would help increase the saving rate in the economy, again required for economic growth.

The issue facing policy makers is sliding growth and high inflation. It is here that Subbarao's skills would be assessed in 2013-14. Though he did not budge even before North Block on rate cuts in much of 2012, he would have to ensure that growth is not curtailed further by the sole focus on inflation which many say could be tackled by supply side measures rather than tightening noose on money supply.

Chidambaram's map for the fiscal deficit aims to bring it down to three per cent of GDP by 2016-17 from an estimated 5.3 per cent in 2012-13. It depends on various things. One is the much-touted reform of subsidy delivery (spending on which is to rise from the budget estimate of 1.9 per cent of GDP to 2.4 per cent), through direct cash transfer (DCT). The Aadhaar platform being rolled out by the Unique Identification Authority of India, led by Nandan Nilekani, is to play a pivotal role. The government will test the efficacy of DCT in 43 districts of 16 states from January 1, on many of its flagship programmes.

Then, there are the taxation reforms, such as GST, meant to create a common market for goods and services. The Empowered Group of State Finance Ministers, chaired by Sushil Modi of Bihar, needs to be convinced. His predecessor, then West Bengal finance minister Asim Dasgupta, evolved a consensus on the much wanted state-level Value-Added Tax (VAT). The GST is like a national-level VAT. If introduced, analysts believe that it would help raise GDP growth by 1-1.5 per cent. However, its roll out has been ill-fated, due to the lack of consensus -- it was originally scheduled from April 2010 and 2013-14 is just three months away, with no sign of a roll out. It needs a consensus across political parties by a big majority to become a reality.

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