As finance
minister Pranab Mukherjee gets ready to leave the North Block later this
week, his successor will be confronted with five critical tasks initiated
by him — cut Subsidies to reduce expenditure; fast-track FDI reform to
bring in hard currencies; insurance and pension reforms; get infrastructure
spending to deliver the goods; and kickstart tax reforms through goods and
service tax (GST) and the direct taxes code (DTC).
Regardless of
whether the job is taken up by Prime Minister Manmohan Singh, aided by his
two trusted lieutenants — C. Rangarajan, the former RBI governor, and
Montek Singh Ahluwalia, plan panel deputy chairman — or by a politician
such as home minister P. Chidambaram or commerce minister Anand Sharma,
these five jobs are crucial to India’s future economic course.
1. Subsidies: Mukherjee has
been working with states to make them give tax concessions on petrol and
diesel and match the reliefs with similar cuts in central taxes, thereby
reducing the government’s fuel subsidy burden. State levies on petrol and
diesel range from 15 per cent in Puducherry to 33 per cent in Andhra
Pradesh. Karnataka, Maharashtra, Tamil Nadu and Bengal also have high fuel
taxes. Besides, the taxes are ad valorem, meaning the amount goes up with
the prices.
Mukherjee wanted
states to cut taxes by up to 25 per cent. The bold measure obviously requires
adroit political manoeuvring to get off the ground.
Urea subsidy is
another area the new Czar at North Block will have to train his guns on.
Increasing urea
prices every year for the next three years and eventually introducing free
pricing in fertilisers will help the government to check its huge subsidy
bill and also save farms from being turned into wastelands by the overuse
of heavily-subsidised urea.
2. FDI Reforms : The depreciation
of the rupee, which has lost around 24 per cent of its value in a year, is
snowballing into a major area of concern. Though India has one of the
largest forex reserves, it needs to shore up its investment as a large part
of the foreign exchange is in the form of debt. To bring in a fresh wave of investment,
the government wants to not only open up FDI in retail, defence and
aviation but also revive stalled insurance sector reforms.
3. Pension and Insurance reforms : Even if the FDI
cap on insurance can’t be raised because of political compulsions,
Mukherjee’s other proposals reforming the insurance sector, can lift market
sentiments and rake in hard currency. Chief among the reforms is to allow
Lloyd’s to open a trading floor in Mumbai, permit foreign reinsurance firms
such as Swiss Re and Munich Re to enter India and give a green signal to
public non-life insurance companies to raise capital by selling minority
stakes.
4. Spending : Earlier this
month, the Prime Minister had held a meeting of infrastructure ministries
to try and push them into meeting their spending commitments. But in truth,
this job is done best by two people – the finance minister, who holds the
purse strings and sits in on all meetings on permission for projects, and
by the Planning Commission deputy chairman, who appraises the projects. To
rev up growth it is just as important to spend money on infrastructure projects
which can pep up the economy as it is to stop spending on wasteful
subsidies.
5. Tax Reforms: Implementation
of the goods and services tax will be on the top of any finance minister’s
priorities. This tax reform measure, which will help to unify India’s
markets and increase its GDP by 1-1.5 per cent, has been held up because of
opposition from BJP-ruled states and to an extent by Bengal.
The direct taxes
code, will, however, be a simpler task as most of the hard work has already
been put in by Mukherjee’s team and now just requires some fine tuning.
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1 comment:
Couldn't highlight more on spending? Especially the Defense purchases?
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