Structural inflection points in a nation's economic deve-lopment are few and far between. During the last decade, the Indian economy experienced a sharp uptick in 2003-04 that lasted till 2007-08, led by a number of positive factors. We stand at another inflection point, but unfortunately the same indicators that propelled the earlier surge now indicate that the growth graph could remain flat as we head into the 12th Plan period.
GDP data for Q3 released this week show dropping rates of growth for the last seven quarters, with the latest pace at 6.1%. This is the slowest after the global financial crisis erupted. The stagnation in manufacturing is most disturbing, since the sector is expected to add millions of new jobs in the next decade. Besides addressing the short-term imperative of getting manufacturing growth up, budget 2012-13 must look at the bigger picture of how India can have its own phase of industrialisation with the concomitant benefits of employment creation for a 100 million people which the National Manufacturing Policy (NMP) advocates.
In relative terms, India's growth still outperforms most of the rest of the world. That is not enough for a country housing the world's largest number of poor. Growth stimulants must be reinforced to achieve the aspirational 9% GDP target set in the 12th Plan. Two driving forces stand out in the growth effort: government finances and corporate investments. Strong control over the fiscal situation in 2003-04 to 2007-08 helped open the space for the corporate sector, which significantly improved its contribution to total savings from 4.6% of GDP to 9.4%. This helped boost the critical ratio of gross fixed capital formation to GDP to a peak of 32.9% in 2007-08.
Today, the deterioration in fiscal deficit is reflected in dwindling investor confidence and delayed projects. This has pushed up the effective cost of capital, and crowded out private sector investments. As flagged by the prime minister's economic advisory council, private corporate capital formation plunged from 14.3% to 9.9% in the last four years.
Correcting the fiscal deficit will require dual actions to expand government revenues and curb expenditures. CII has suggested several steps to unlock revenues from various sources: auctioning assets locked up in sick PSEs, widening the tax base, settling disputed tax cases, disinvestment and shifting to accrual-based budgeting, among others.
Better targeting and delivery of subsidies lie at the heart of the expenditure side. In particular, direct transfer of cash subsidy for efficient delivery of kerosene, LPG and fertilisers to people living below the poverty line may help reduce subsidy outlay. The Fiscal Responsibility and
Budget Management Act must also be amended for clarity on timelines in reducing the fiscal deficit.
For corporates, inflation, rising interest rates and increasing input costs have pressured profit margins, so that less funds are available for investment. Lag in policy actions such as coal and power, land acquisition, and FDI in multi-brand retail further led to lowering business confidence. The budget can be a huge opportunity in restoring investor sentiments, such that shelved projects are brought back on track.
Infrastructure investments are critical and have to be addressed in mission mode, including steps such as widening the definition of infrastructure for tax purposes, attracting greater private sector participation, and enlarging access to long-term funds. The 12th Plan envisages $1 trillion of expenditure on transport, power, urban amenities, etc. Half of this is expected to come from private sources. A real effort to fast-track 100 mega projects could have major downstream impact.
Secondly, inflation is the other major challenge facing the economy. The latest figures show food inflation to be under control overall, but the episodic spike in prices of primary articles is a matter of concern. Currently, manufacturing inflation is also higher than comfortable levels. Policy clearances and NMP's rapid implementation are required to boost manufacturing.
Supply-side measures would create the necessary capacity to overcome price rise. Raising agricultural growth and productivity is imperative, requiring initiatives in areas such as seeds, irrigation and watershed management, pest control, finance and mechanisation. Wastages in the supply chain from farm to households can be greatly eliminated by enabling large investments - including FDI - in organised retail.
Rural infrastructure creation under Bharat Nirman can be allocated higher funds. Power is another hurdle to be overcome through reforms in distribution, incentives for fuel exploration and pipelines and other steps. There's need for a more rational oil price and subsidy system.
Finally, industry looks forward to the tax announcements each year with much anticipation. Deadlines for the direct taxes code and the goods and services tax, both major reform initiatives, have repeatedly undergone extension. Meantime, there is a strong case for raising personal income tax exemption limit and doing away with surcharges and cess on corporate tax.
The budget must resist the temptation to raise revenue by increasing excise duty. Such a step will add to inflationary pressures, besides hampering any scope of recovery of the industrial sector. Likewise, lowering excise is not feasible if the fiscal situation is to be ameliorated. It is best to leave the rates at existing levels. The same is applicable to service tax, which however could be extended to more services. In the case of customs duties, the rising level of imports should deter lowering peak duties from current rates.
In a precarious global economic scenario, we find ourselves at a time of enormous challenges and enormous oppor-tunities. A bold, creative and ambitious budget will set the pace for India to rise to its aspirations.
Source : economictimes.indiatimes.com