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| Amul ad poking fun at the Sensex |
India’s dismal early forecast for 2012-2013 financial year’s
economic growth, at a decade low of 5 per cent, should have meant glum faces at
North Block, home to the country’s finance ministry.
However, strangely, not too many of the Mandarins who work
in that cavernous red stand-stone Raj-era building seem too worried, rather they
seemed perversely pleased. Probably, because the figures could actually come in
handy for finance minister P.Chidambaram and his economist boss, Dr Manmohan
Singh, when the duo argue for tough reform measures with cabinet colleagues and
Congress party leaders, who ahead of crucial general elections early next year,
want to see more populist measures and less of belt-tightening reforms.
Data released by the Central Statistical Organisation places
growth forecasts far below an earlier 5.5 per cent prediction by the Reserve
Bank and an optimistic 5.7-5.9 per cent target set by the finance minister
P.Chidambaram and far average growth rate of 8-9 per cent, achieved through the
last decade.
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| Singh-Chidambaram duo |
The Singh-Chidambaram duo will have the advantage of this
gloomy picture to force reluctant colleagues into agreeing to slash oil
subsidies and fat defence budgets as well as steering opening up of the economy
to more foreign investment and cutting red tape in doing business.
The schism within the cabinet had often spilled out in the
open in the last few months, with tough decisions like subsidy cuts being
pushed on the backburner several times at cabinet meets, before being finally
accepted. Spats over auctioning gas blocks between petroleum and defence
ministries and opening up coal mines between steel and environment ministries still
remain unresolved despite the Prime Minister chairing meets to sort out such
rows.
No wonder Indian industry has been talking of policy
paralysis.
To make things tougher for the Congress leadership, BJP’s
poster boy and almost certain prime ministerial nominee Narendra Modi, has begun
selling the `Gujarat development model’ with slogans like “minimum government
and maximum governance” and "inculcate skill, scale and speed to compete with China”.
Singh and Chidambaram desperately need now to show that they do
have a `Delhi development model’ up
their sleeves and that too speedily!
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| Narendra Modi sells Gujarat Model |
Yesterday’s data forecast said farm sector could grow by
just 1.8 per cent in 2012-2013, compared with 3.86 per cent in the previous
year, while manufacturing could slow down to 1.9 per cent from 2.7. This is the
slowest pace of growth for the manufacturing in the past 14 years. Even the
services sector which for the better part of the last decade grew in double
digits, could grow by 8.6 per cent.
In the first half (April to September) of the financial
year, the economy grew at 5.4 per cent, today’s data indicates that the economy
may have grown by just 4.2 per cent in the quarter ending December 31, 2012 and
may grow by 5 per cent in the current January to march quarter.
This data points to the desperate need to bring in reforms
to boost infrastructure and manufacturing growth. Industry chamber Ficci has
already flagged: “Quicker implementation of the National Manufacturing Policy,
speedier decision making under the aegis of the Cabinet Committee on
Investments, ushering in the Goods and Services Tax regime, passage of the
insurance and pension bills in the next session of the Parliament and bringing
greater competition in the coal mining sector” as ways to get ahead.
The industry wish-list more or less tallies with
Chidambaram’s reforms-to-be-taken-up list, with additions like less largesse on
populist subsidies and tax reforms which help Indian firms stand up better to
foreign competition.
Finance Ministry officials want to redraw duty structure so
that domestic capital goods, electrical gear, telecom industries and even steel
which have been facing import pressure can again revive.
Proposals in the offing would place higher duties on imports
in these sectors, while reducing duties on raw materials such as iron ore, coal
as well as components which go into making electrical or telecom gear and
having a tax structure which encourages domestic telecom and electric
equipment.
India had drawn up a tax structure which imposed high duties
on finished cars imported into the country, less taxes on semi-finished cars
and far lower taxes on cars which were at least 70 per cent indigenous. A
similar structure is being looked at for the telecom equipment industry.
However, what industry captains really want is ground level
reforms such as setting up a coal regulator. India has long been debating
setting up an independent coal regulator as besides the single monopoly coal
producer – Coal India – a large number of firms have been given captive coal
blocks and some have been allowed to trade surplus production.
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| Amul ad on Coal scam |
The government is also expected to step up the gas and put
up some 54 coal mines up for auction to a limited field of buyers –iron and
steel factories and cement and electricity plants - over the next four months.
The auctions, speeded up by allegations of scams in earlier allotment of mines,
are expected to yield precious revenues to state government coffers and much
needed coal to fire coal-burning furnaces and power plants.
The Government has cut base prices for another round of
telecom auctions, which should bring in some more money into government coffers
and at the same time give telecom firms more radio-waves to base future mobile
connection sales. India has about 935 million mobile connections for 1.2
billion people, and unless better connectivity and services can be ushered in,
growth may soon flatten-out after slowing down to just 2.25 per cent on a
year-on-year basis.
Officials say Prime Minister Singh is also pushing them to
clean up a Direct Tax Code, which could jiggle tax rates, while enlarging the
tax base. The DTC is expected to simplify tax laws, lead to less legal disputes
over taxes and ultimately bring better compliance. Industry says any tax reform
measure always helps business grow and bring more of the `parallel’ economy
over-ground, with more businesses declaring their tax liability.
However, two reform measures promised to industry at large
and foreign investors in particular could remain in doldrums unless the
government does a better job at floor management inside the parliament.
In the last parliament session, the government was unable to
go ahead with voting on the insurance bill as no agreement could be reached in
back-room parleys with opposition and supporting parties on a clause which
seeks to raise FDI to 49 per cent.
Officially the debate will be shifted to the next session of
Parliament. The BJP had earlier agreed to help pass the insurance bill,
provided the foreign investment cap was retained at the current level of 26 per
cent.
Linked to this is the fate of the pension regulator bill,
which gives teeth to the regulator and allows foreign investments into pension
funds. The FDI limit in pensions is linked to the limit in insurance firms. It
could be taken up separate from the insurance bill and passed, allowing foreign
pension funds to buy up to 26 per cent stake in Indian pensions for starters,
but a final call on this could depend on how the voting numbers stack up in the
coming Parliament session.
