Subir Gokarn: It's only words

For good reason, the reforms of 1991 and beyond have come to be associated with the finance ministry. On its part, it has continued to play the leading role in the process.

Tax reforms, financial sector restructuring and interest rate deregulation are among its significant contributions to the reform agenda and all three have played central roles in driving the economy to its current state of macro-economic comfort.

But beyond these direct contributions, one would have hoped for more. Given its control over the purse-strings, it could, conceivably, have used this as a lever to push the reform agenda across the entire spectrum of government.

It could have developed a carrot-and-stick approach to get the other economic ministries to align their legislative and administrative plans with the reform blueprint. The wide disparity of achievements across different branches of government is rather disappointing testimony to the limited influence that the finance ministry has over the rest of government.

This is the main cause of an increasing disconnect between the tone of recent Economic Surveys, the latest of which was tabled in Parliament yesterday, and the contents of the Union Budgets. The Survey is an exclusive statement of the finance ministry and gives it free rein to articulate both its sources of optimism and its causes for concern.

To the extent that the latter relate to factors within the ministry's domain, one can interpret the Survey's position on these issues as a signal of initiatives that will be taken in the Budget.

However, the Budget, even though presented by the finance minister, is a statement of the government as a whole. There is no guarantee that the finance ministry's views on issues outside its domain will find a place.

Year after year, the Survey lays out a list of reform measures that it believes are in the interest of both accelerating growth and reducing poverty. Sometimes, these desires are also expressed in the Budget speech itself. But, for the most part, they have either remained unaddressed or have moved with aching sluggishness.

This year's Survey is no exception. If one has bought into the broad reform agenda, which has been in play all these years, one simply cannot quibble with the issues and the proposed solutions that are laid out at the end of the first chapter in the "Issues and Priorities" section.

Fiscal consolidation is on top of the list and, since this is within the ministry's domain, it will clearly be top priority in the Budget. The statement sets a basic tone of cautious, calibrated adjustment, driven by the need to balance tax rationalisation with the compulsion to maintain a revenue flow.

The signal is that indirect taxes, which constitute the bulk of revenues for both Central and state governments, will be rationalised but only gradually.

There is also a clear indication of direct tax reforms via the phasing out of exemptions, but no explicit commitment to a lower rate, which would be a logical consequence.

What is emphasised is the increased use of technology to identify taxpayers and match declarations with payments. There is also a mention of aligning customs duties to Asean levels, which has been a desire expressed for many years now, but in the current context, could indicate a lowering of the peak rate.

The second issue within the ministry's domain that is given priority relates to the efficiency of the financial sector.

In terms of the basic objective of increasing access to and lowering the price of credit to all classes of consumers, be they farmers, businesses or consumers, one would expect to see an aggressive push towards facilitating efficiency-enhancing consolidation amongst public sector banks as well as a more liberal position on foreign ownership and control. These are not directly referred to, of course, but are logical implications of the goals for this sector.

The third issue within the ministry's control is foreign direct investment (FDI). The Survey argues that increasing foreign investment, both of the direct and portfolio varieties, is desirable for all the reasons that theory suggests.

Essentially, it says that the Indian economy is well-positioned to capture the potential benefits from these flows, rather than being vulnerable to possible negative impacts.

In particular, insurance, coal mining, construction (on which a decision was taken this week by the Cabinet) and retail trade are likely to generate significant benefits with the entry of foreign investment.

This is music to the ears of reformists, but the political battle cries have already begun. This may well be one of those things that is included in the budget on sheer hope and then used as a bargaining chip to get something else through.

The three other priority issues that the Survey lists are infrastructure, agricultural reforms and barriers to exit. This is where the limited span of control of the ministry is going to hurt.

On exit, while the SARFAESI Act legislated in 2003 is the ministry's substantial contribution to facilitating it, constraints on labour retrenchment and local restrictions on land redeployment significantly dilute the impact of that act.

The discussion on infrastructure refers to the need for creative combinations of public and private activity, such as the minimum subsidy bid approach.

However, developing viable business models in these sectors depends on policy and regulatory clarity, which is very much in the domain of the respective ministries, both at the Central and state levels.

On agriculture, the whole gamut of distortions in the sector "" price support, input subsidies and the like "" are clearly something the finance ministry would like to see dramatic changes in. It makes the important point that there is a critical trade-off between the resources being sucked up by subsidies and those needed to boost investments in rural infrastructure.

The latter are absolutely essential if agricultural productivity is to be maintained, forget about increased. This is an excellent argument, but will the concerned ministries bite?

In sum, the Survey reassures reformists that the finance ministry has no intention of giving up its role of championing reforms. If only it could put its money where its mouth is!

(The writer is chief economist, CRISIL)