Events & Issues

New Delhi, 24 September 2012

Reforms’ Hullabaloo

REACH OUT TO COMMON MAN

By Dhurjati Mukherjee

Notwithstanding Prime Minister Manmohan Singh’s rare address to the nation justifying his Government’s decision to initiate reforms as well as to blunt the Opposition attack, the common man is perplexed. Amidst the hullabaloo, how does he or the middle class gain or lose out from these reforms is a nagging question on his mind. While diesel hike and restrictions on gas cylinders will impact his pocket, how will FDI in multi-brand retail help him or for that matter ensure that the small traders or the kirana shops are not affected, are issues that need simple answers. To say that the country needs investors to prevent another 1991 type of crisis, or that money is needed for subsidies shall not suffice.

Importantly, one other issue that needs emphasis is the imperative need to make the Government efficient and productive and cut down on all types of unnecessary and unproductive expenditure, both of the bureaucracy as also of the politicians. How much the UPA-II, and, in particular the Finance Ministry, succeeds in its mission is another grey area under watch.

While the Opposition likes it or not, the reforms process has started. At least for the industry there are expectations that India’s organized retail may attract up to $ 16 million FDI in the next three years of which front-end investments would be $ 6 million and back end investment $ 10 million. This apart, the Indian retail market, which was around $ 222 million in 2005, is expected to hit $ 700 billion by 2015. But other than statistics, it is important whether the Government can instil confidence among the neighbourhood vendors or the small traders that they are too part of the big picture. 

A section of political analysts believe that India yielded to very strong American pressure to open up the retail sector even though it may not have been necessary now. While time will tell, assurances given must be kept. One such case is the aviation sector. It is heartening to note that the concerned minister made it clear that foreign airlines would have to face a detailed background check before they are allowed to invest in Indian carriers. It is expected that FDI in airlines will open up opportunities for both domestic and foreign carriers which should eventually go a long way in strengthening the aviation sector in the country.

Meanwhile, all the decisions were in line with the Prime Minister’s Economic Advisory Council (PMEAC) which had called for bold reforms, including hike in diesel price, a cap on subsidized cooking gas cylinder, besides opening up multi-brand retail. It also projected that the economy will grow at 6.7 per cent in the current year, based on expectations of better industrial performance in the second half of the fiscal as well as positive developments by the Government to attract investments.

It is no secret that reforms in certain sectors of the economy were in the air for quite some time, since Chidambaram took charge of the Finance Ministry. He had indicated that adjustments need to be made on expenditure and the revenue side and towards this end had formed a three-member panel headed by 13^th Finance Commission chairman Vijay Kelkar to work out a path of fiscal consolidation. While the plan is to keep the fiscal deficit at the budgeted level of 5.1 per cent current reports indicate that it may touch around 6 per cent. Disinvestment from stake sales of PSUs is a key recommendation to bridge the fiscal deficit.

Pointing out that disinvestment increases non-debit capital receipts, thereby allowing the Government to increase its capital expenditure without impacting fiscal deficit, the Commission suggested a listing all public sector firms which would have brought in an estimated Rs 381,000 crores. Around eight companies are likely to go in for stake sale this fiscal and names of Hindustan Copper, MMTC,Oil India NALCO have already been announced, which would yield around Rs 15,000 crores.

Meanwhile, Chidambaram has also directed banks to cut interest rates and reduce EMI for durables as part of a strategy to push consumption-driven growth. “Consumers must be encouraged to buy more durables”, is the diktat to bankers. This apart, rescheduling of farm loans in drought-affected States and revision in procedures for easy sanction of education loans to students has to be announced.

With the subsidies increasing at a high rate – fertilizer subsidies pegged at Rs 75,000 crores, oil subsidies expected to be around Rs 160,000 by selling regulated cooking and auto fuel below international prices – there is need to cut down on these as also other expenditure. This apart, the Government needs to ensure that the subsidies meant for the poor do not continue to go into the wrong hands.

Growth can be propelled only be shredding the ‘unbearable’ fiscal burden and the Government can begin with dismantling fertilizer subsidy “without causing disarray” to rein in the fiscal deficit, the PMEAC panel had stated. It argued that contribution of subsidies to productivity enhancement is fast disappearing. However, of the Rs 65,592 crores budget estimates for fertilizer subsidies during the current fiscal, about Rs 35,000 crores have already been disbursed.

Regarding multi-brand retail, the panel wanted States, who are receptive to the idea, to implement the same after ascertaining the whole issue. This, it was felt, should improve supply chain infrastructure for farm produce, processing business and related activities. However, close on the heels of the recommendation, Minister of State for Commerce & Industry Jyotiraditya Scindia, had in Rajya Sabha stated: Switzerland-based UNI Global Union, in a paper on Wal-Mart’s business practices in some countries, concludes that “without adequate safeguards put in place, FDI in multi-brand retail will lead to widespread displacement and poor treatment of Indian workers in retail, logistics agriculture and manufacturing.”

The paper does confirm fears and even though Wal-Mart has already established its presence in many States and Union Territories (around 11), its entry along with others has to be subject to strict monitoring. While the oft-repeated phrase “policy paralysis” has been broken, an area where Chidambaram can also move quickly is the reduction of fiscal deficit. The switch from a positive to a negative list in service tax is already generating huge additional revenue as also additional collections from the increase in excise rates. Realizations from re-auction of 2G spectrum will also be a great bonanza in addition to larger realizations this year from sale of PSU equity. With these revenue gains, the deficit reduction target should more or less be fulfilled, even without a large reduction in the diesel subsidy.

The present need is to gear up the economy and ensure there should be at least 6.2 to 6.5 per cent growth and attracting foreign investment. Simultaneously, in initiating reforms it has to be seen that the lower segments of society are not affected in the zeal to boost up growth. The Government needs to reach out to them at least if not take them into confidence. ---INFA

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