Budget 2012: Reforms-oriented budget to instil confidence among investors is sorely needed

Budget 2012: Reforms-oriented budget to instil confidence among investors is sorely needed

Chandrajit Banerjee

Pre-budget consultations have commenced and it is time to address the challenges confronting our economy. While reviving growth momentum is the need of the hour, high inflation (albeit declining) and widening fiscal deficit have narrowed room for monetary and fiscal manoeuvrability. So, new avenues must be devised to augment investment without compromising on government's fiscal deficit which has the tendency to crowd out private investments and push up interest rates.

According to CII's estimates, the government's fiscal shortfall would be in the range of 5.5-6.0 % of GDP. To bring this down, amendment in the Fiscal Responsibility and Budget Management Act would help by setting out a clear roadmap. Efforts should also be made to raise revenue by widening the tax net, controlling subsidies and unlocking funds in disputes and litigations.

Unlocking the revenue potential from the sale of government assets should assume greater priority. The government should announce a clear roadmap for the disinvestment process over the next five years. This is important as most of the time, disinvestment targets have been missed by great margins. This year, for instance, against the target of 40,000 crore for the full fiscal, a meagre 1,100 crore has been realised so far. Thus, target setting and realisation of that target is important.

The government could also undertake a census of land and other assets locked up in Central Public Sector Units that have turned economically unviable. While a transparent auction could be looked at, the focus should be to get the highest possible value using the most transparent mechanism. While the government can do this for CPSEs, sick state PSEs should be looked at by state governments. After all, a high fiscal deficit is not the problem of the government of India alone.

At a time when expansion in investments have assumed a sharp downward trend, private investments need to be incentivised in critical areas of the economy. Policy issues are needed to boost agricultural output on which a large proportion of the population remains dependent. Private sector should be incentivised to participate in farm mechanisation, agricultural markets and cold chains. Legalising land leasing at the state level and freeing it from the Land Ceiling Act could attract private investment. Incentives to states for adopting the model APMC Act and denotification of dairy and horticulture items can also attract capital infusion into the farm sector. Integration of water harvesting and its management with MNREGA can be promoted.

Infrastructure and power generation too require special attention to attract investments. A common definition of infrastructure is needed, while in the power sector, coal supply must be rationalised and fast-tracked along with distribution reforms. Promoting foreign investment in infrastructure by easing norms for entry of foreign funds to this sector is another option to enhance investment. Other important measures to boost investment could include creating a shelf of bankable projects - particularly in the infrastructure sector, extending weighted deduction on in-house R&D across all industries, amending the definition under Sec 80-1A to include rural initiatives etc.

In the social sector, private participation can catalyse healthcare and education. The finance minister in his last budget announced infrastructure status for health and educational institutions. For skill development, a special bank could assist funding for trainees, self-employment and skill development institutes. MSME, the seedbeds of entrepreneurship, should be assisted through a variety of measures to promote access to finance and technology. A synergy of MSMEs and large companies can be promoted through tax benefits for sourcing inputs from small industry.

The Direct Taxes Code and Goods and Services Tax are still being thrashed out. A clear deadline for implementation may help speed up deliberations and add comfort to investors. Political convergence is required on the crucial reform of GST, and industry would hope that all stakeholders would strive to rise above political differences and make GST a reality.

Simplification and transparency in the tax system along with assessee-friendly tax administration would revive business confidence which, in turn, would spur demand. The cascading effect of dividend distribution tax must be completely eliminated and investment allowance restored while minimum alternate tax should be reduced.