After wooing investors in Hong Kong, Finance Minister P Chidambaram today laid out the blueprint for economic reforms as he reached out to the investor community in Singapore.
He, however, acknowledged that the possibility of an unstable government after 2014 general elections posed the biggest threat to the reforms. But, the current government is talking to the opposition on various contentious reform bills in the financial sector, he said.
The finance minister expressed the government’s commitment to reduce the Centre’s fiscal deficit to 5.3% of the GDP in the current financial year, primarily through cut in government expenditure and austerity measures. He pointed out that the tax revenues were expected to increase by 10% every year not because of an increase in tax rates but on account of stable tax regime, non-adversarial tax compliance and fair dispute mechanism.
However, a note by Bank of America Merrill Lynch, which hosted the meeting, said the target of reining in fiscal deficit at 5.3% during 2012-13 is well below consensus and its estimate of 5.9%.
Chidambaram was in Singapore a few days after India modified the General Anti-Avoidance Rules (GAAR). According to the new GAAR, which would be applicable from April one, 2016, the rules cannot override the Double Taxation Avoidance Agreement (DTAA) between India and Singapore because there is a clause of Limitation of Benefits in the treaty to avoid its misuse.
Ahead of the monetary policy review on January 29, he said contrary to the perception the finance ministry and the Reserve Bank of India worked closely, but the central bank as an autonomous body was doing is job of controlling inflation.
RBI has defied finance ministry in the recent past by not cutting policy rates. However, it is likely to go for a small reduction in the repo rate in the upcoming policy. RBI Governor D Subbarao is expected to meet Chidambaram on Thursday to discuss the macroeconomic situation.
The note by Bank of America Merrill Lynch said while the cap for debt investments has been raised to $75 billion, the finance minister said the government was looking at ways to make the sub-caps fungible to accelerate debt investments. It is also looking at raising the savings and investment rate to 36% and 38%, respectively.
Elaborating how the government planned to put its house in order, he said public sector companies which don’t meet their investment target by March would be asked to return the surplus money as special dividend to the government, which is a majority shareholder.
The government is also counting on savings under the Direct Benefits Transfer scheme. It is expected to reduce leakage in the subsidy scheme as pilot projects indicate a saving of 20-60%.
One the revenue side, the government is also expecting the disinvestment target of Rs 30,000 crore will be met. NTPC is the next company to hit the markets and can raise around $2 billion, said Chidambaram.
Besides painting a rosy picture of the Indian economy and showing commitment to reforms and liberalization, Chidambaram gave timelines for some key legislative reforms. He is hopeful that the Insurance Bill and the Pension Bill would be passed in the Budget session of Parliament.
“He mentioned that behind the noise, there were quiet negotiations with the opposition parties and support from them,” the note quoted him as saying at the investors’ meet in Singapore.
The finance minister admitted that the Goods & Services Tax (GST) was unlikely to be implemented by April 2013, but the legislation might be introduced in the Monsoon session (around August) and passed it in the Winter session (December).
Chidambaram said a gap was usually seen between planned and actual expenditure in the infrastructure sector, but the government was trying to address the issues through measures such as setting up of the Cabinet Committee on Investments and takeout financing by Infrastructure Debt Funds. CCI will take up projects in oil exploration in its first meeting later this month, followed by coal and other minerals.
He tried to allay industry’s fears on the Land Acquisition Bill, saying it would add a little to the project cost, but would ensure a better environment for companies.
* After Mauritius, Singapore is the second biggest source of FDI inflow into India.
* From April 1, 2000 to November, 2012, FDI from the southeast Asian country accounted for 18.661 billion dollars, 10% of total 186.82 billion dollars.
* India needs high FDI to finance its ballooning current account deficit (CAD).
* CAD stands at a record level of 5.4% of GDP in the second quarter of 2012-13, as well as economic growth.
