Current Status of the Economy :
The New Government has come to power with a massive mandate from the people whose expectations have gone sky-high, as they voted for a stable government with a single party majority. Hence, the First Budget of this Government has to be a ‘Game Changer’ and reflect the government’s road map for economic and social growth, as well as policy-actions to achieve it.
The ground-reality is that the Central Budget has to be announced by July 2014. The time is therefore short to do a full-scale exercise. Yet, the Budget can reveal the directions and thoughts of the New Government, and the strategy to implement them. The present status of the economy is that growth is sluggish, inflation is high, unemployment is widespread and both agricultural and industrial output have dropped to a low level.
Despite this time-constraint, the First Budget may indicate a road map of the government for bringing down the prices and consolidating the Fiscal and Current Account deficits. In the process, economic growth should get a booster through enhancing production and increasing efficiency keeping the States in the loop, wherever there is scope for them.
In our view, some Acts relating to labour and employment need amendment to raise production and job opportunities. The number of unemployed people is really huge, and top economists and experts feel that 15 million new jobs must be created every year, for the coming 10 years, to address the problem of unemployment effectively.
Measures should be introduced to accelerate economic growth which has dropped below 5 p.c.. CPI-Inflation which is moving around 8-9 p.c. for quite sometime, needs to be brought down to boost up the economy and confidence of the investors.
In the short run, growth of industry and the economy will depend on what is going to be done to the Land Acquisition Act., how quickly decisions are taken on the pending projects and how efficiently and adequately the focus-areas like distributive trade, agriculture and infrastructure are provided with public investment and FDI.
In this background, the Chamber would like to submit a few specific suggestions aimed at effectively addressing the major concerns of the industry and the people.
Issue No.1 : High Prices – Need to Moderate
High food inflation is a matter of serious concern. Prices of Consumer durables and Services have gone up so much that common people cannot simply afford them.
Prices of services which comprise a significant part of Non-Food Items have also risen sharply, driven mainly by labour-costs which in turn are pushed up by food prices. Food inflation is thus feeding directly into inflation on which monetary policy has no direct impact. Yet, RBI has been following a tight-money policy which is adversely affecting investment and economic growth.
Food Inflation is mainly a supply-side constraint, which calls for a re-look at Agri-Policies.
Suggestions :
In the short-term, policy action should focus on the following areas :
- Strict action to prevent leakage in Public Distribution System.
- To unbundle FCI’s operation in storage, distribution & procurement.
- To set up a Price Stabilisation Fund.
- To use record Foodgrains Stock to control prices.
- Agricultural Produce Marketing Acts in different States need to be repealed to eliminate middlemen and facilitate farm-to-shelf linkages. This action is bound to have salutary impact on the prices.
- Impact of Food Security Act. should be reviewed. Poverty-level in Rural Areas at 75 p.c. and in Urban Areas at 50 p.c. seem to be over-stated. The data should be realistically fixed for entitlement of food at subsidised prices.
Free or nominally priced Rice/Wheat etc. may be given to the destitutes and really needy people. BPL people should get these items at moderate prices, so that subsidy amount can be reduced substantially.
In the Medium-term, the following steps are urgent :
- Not doles, but income-earning and creation of productive assets for the economy against huge spending on poor sections of the population should be the policy of the government. Hence, activities like MNREGA and similar schemes need to be restructured and revamped to create useful assets against such spending.
- Agriculture needs to grow at minimum 5 to 6 p.c. and record 2-3 times higher productivity. This can be achieved by application of new technology, better seeds, higher mechanisation, farm-to-market linkages and adequate storage facilities. Adequate investment in agriculture is the answer to higher output growth.
- Over 33 p.c. of the country’s production of fruits, vegetables and foodgrains worth 50,000 crores are wasted every year for lack of proper storage and transport facilities. Hence, it is urgent that like foreign retails chains, the domestic Retail Chains also should be asked to spend a minimum 33 p.c. of their investment in building up back-end infrastructure. This will modernise retail business across the country, enhance its efficiency and reach to all consumers and reduce wastage which will certainly bring down prices for the consumers.
Issue No.2 : Industry – Speedy Clearance of Projects, Supply of hassle-free Quality Inputs & steady Fiscal Policy needed for revival
Industry is shrinking. After growing at 9 p.c. in over the period 2009-11, it nose-dived to a negative growth of (-) 0.1 p.c. in 2013-14. Manufacturing also dropped sharply from 11.3 p.c. to (-) 0.8 p.c. over this period. The National Manufacturing Policy set a target of 25 p.c. of GDP for this sector. But it is only 16 p.c. now, as against 34 p.c. in China. Hence, employment generation also has suffered heavily. Revival of investment in Manufacturing and Industry across the country is the key challenge now.
The relationship between government and industry that soured over the last few years is expected to improve now. Any effort to expand, construct and invest should not be assumed to reek of some dubious activities. To protect environment and poor people’s habitation, the existing Acts need to be amended so that Industry can grow while providing required land and also good life for the land-givers.
India is still a low-income economy, with a growing pool of millions of young workers who need jobs. Thus, while protecting environment and compensating the land-givers, we must keep in mind that industries also have to come up fast and expand to employ and feed 1230 million people. It is a trade-off, which is inescapable in reality.
To reverse the current trend, following actions are urgent :
- A positive investment sentiment must be created in the country and stimulated by taking immediate actions like clearance of all pending projects.
- Policy action should focus on MSMEs which account for 40 p.c. of industrial output and generate maximum job opportunities with minimum capital investment. Bank credit on easier terms should be earmarked for this sector, and latest technology and marketing facilities provided.
- New initiatives like setting up Investment & Manufacturing Zones, Cluster-growth and e-Biz projects should be encouraged to kick up the industrial growth.
- Pari-pasu ‘Skill development’ programmes should be immediately stepped up throughout the country, to generate a vast pool of skilled manpower in the economy. This will also equip millions of youth brigade into a formidable power-house of economic growth, thereby harvesting the ‘demographic dividend’ which India enjoys today in the world.
- The SEZ Scheme was initiated in 2006 to stimulate export production and enhance supplies to the domestic market. Developers of SEZ and Industrial operators were assured tax-breaks for 15 years. Both production and tax-free exports zoomed. But suddenly in 2011, MAT was levied at 18.5 p.c. and dividend distribution tax (DDT) at 10 p.c. on the developers and operating industries which have stunted their growth.
We suggest that the unexpected and depressing tax-burden on the entrepreneurs should be withdrawn and the promised tax-breaks allowed to save them from high losses and also to restore their confidence in the government policies.
Issue No.3 : Power and Raw-materials
The power sector is saddled with over 130 held-up projects, involving an outlay of about 7 lac crore. New Thermal Power Plants with installed capacity of 20,000 MW are lying idle for want of coal linkages.
India has the 3rd largest coal deposit in the world and yet it is the largest importer of coal. We think, it is high time that coal sector is de-nationalised and opened up to the private sector which can step up production with its resources, expertise and professional skills and provide a solution to the serious problem of coal shortage which is affecting many industries across the country.
Issue No.4 : Tax Scenario – Direct and Indirect
- a. Fairness, Speed & Certainty :
The New Budget needs to mention clearly that the GST reforms will be brought in at an early date. A Revised DTC also needs to be implemented from the next year. The Budget also can reassure the investors that government will not take any steps with retrospective effect, while tax evasion will be dealt with strongly.
Government should aim at fiscal consolidation. It means that Fiscal Deficit has to be reduced to 2.5 p.c. norm in phases, starting with 3-4 p.c. this year. With economic growth moving up, this would help bring down the country’s Debt-to-GDP ratio.
- b. Income & Expenditure :
The main issue for the government, however, will be to try to raise the Tax-to-GDP ratio which remains low in India. This would call for broadening the production base and improving tax administration through creative use of Information technology.
On the expenditure side, the share of capital expenditures should be gradually raised to minimum 4 p.c. from 1.76 p.c. now to ensure that funds are available to eliminate deficits in infrastructure which includes electricity, piped water, sanitation and public health services. Health expenditure needs to be raised from the current level of 1.3 p.c. of GDP to 2.5 p.c. in a graded manner.
- c. Subsidy and Doles :
Government will have to cut subsidies in order to finance the proposed additional expenditures which are essential for improvement of living standards of the people. India has many subsidies on diesel, kerosene, cooking gas, fertilizers, that undermine efficiency while benefiting particular sections of the society.
The phase-out of subsidies on Diesel is already underway. Fertilizer subsidies which have led to overuse of fertilizers and damaged the quality of soil and environment also need to be phased out. Subsidies on both Electricity and Water lead to the wastage of water, specially in agriculture where ‘drip irrigation’ and ‘water-saving irrigation technologies’ can be encouraged.
- d. Disinvestment :
These measures while necessary may not be adequate to achieve fiscal consolidation. Hence, government will need to depend on Disinvestment on a larger-scale. It may consider outright privatisation of some of the sick and weak public sector units.
Government should not put in public money into such units. Rather, after a review by the experts on the current status and near-future prospects of these units, government may go in for privatisation through the disinvestment process.
Issues No.5 : Banks and Basel III Norm
It is agreed that banks in India do not have enough of a buffer in capital-base to absorb the shock of unexpected losses, arising from bad assets. But the banks in advanced countries maintain this buffer in capital base. The Central government is putting huge amount of money into the banks to strengthen their capital base in phases.
We feel that weak banks in India who are unable to earn adequate profits and meet the Basel III norms reflect inefficiency, lack of efforts and dynamism in their operation. The remedy lies in their merger with stronger and more innovative Banks or de-nationalisation, but certainly not in diverting huge public funds in re-capitalising them.
Issue No.6 : Indian Population – Need for control & A Policy
We are having the second highest population which has given us ‘demographic dividend’ and ‘largest electorate’ in the world. But, the Poverty level also is very high, and a large section of the population depends on subsidies and doles. India’s population of around 400 million in 1951 shot up to 1230 million in 2013, and it is still growing at 1.5 p.c. to 2 p.c. per year, compelling the previous government to bring in a legislation like the Food Security Act.
When the 5-year Plan was introduced in 1951, no Biological Plan was taken up, with set targets. The situation drifted, with occasional measures taken to spread awareness among the people about the merits of a small family.
We think that an effective Population Policy is needed to prevent the growth-rate by announcing an official policy of ‘Hum do – Hamare do’ norm or any other criteria. Instead of being only persuasive, the Policy should have an in-built mechanism to reward the policy-abiders and penalise the policy-breakers. The economy will certainly be in a much better shape in the coming years, if a well though-out population policy is put in place.
Issue No.7 : Reservation Policy – Skill & Efficiency or Caste & Religion
The Constitution envisaged very limited reservation. Articles 15 & 16 do not allow any discrimination on grounds of race, religion, caste etc. But over the years, the original idea has got diluted. We feel that the original aim of the Constitution to provide equality of opportunity for all in the society should be upheld and promoted.
The present system of the Union government earmarks 49.5 p.c. for the ‘reserved classes’ of which 27 p.c. for OBCs, 15 p.c. for SCs and 7.5 p.c. for STs. Besides, 15 p.c. of vacancies in the PSUs and 7.5 p.c. in Educational Institutions, are reserved for SC & ST.
We feel that reservation as a means of lifting the under-privileged sections of SC/ST/OBCs is a welcome and reasonable move. But there is no reason for extending the facility beyond providing opportunities for learning. Reservation should cease to exist at this stage. Any recruitment to the Services, Education, production or R&D sectors should be made strictly on merit basis. This is urgent, if India has to build up a really competitive pool of skilled man-power, top-level technologists & innovators and administrators.
Finally :
The Central and State governments together are expected to collect more than 20 lakh crores by way of taxes and duties. This money comes from all sections of the society, from richest to the poorest. Even a slum dweller using minimal electricity contributes by way of electricity duty to the State.
Our submission is that such money should be put to ‘use’ by investing in infrastructure and building productive assets, empowering the under-privileged by giving them education and/or vocational training so that they become employable and can contribute to the economy of the country, rather than keeping them dependant on doles and subsidies year after year.
Not only the Central Government should follow the policy of minimal subsidies but should make sure that the States also fall in line to use their resources and central assistance productively, to which criterion the financial assistance provided by the central government to a particular State should be linked.