Low and Stable Inflation, Tax and Expenditure Reform and a Well-Functioning Market Economy a Must to Improve Long-Term Growth Prospects

Investments can be revived by improving long term-growth prospects. For this, reforms are needed on three fronts: creating a framework for sustained low and stable inflation, setting public finances on a sustainable path by tax and expenditure reform, and creating the legal and regulatory framework for a well-functioning market economy.

First, the government must ensure a low and stable inflation rate through fiscal consolidation, establishing a monetary policy framework, and creating a competitive national market for food. Initiation of reforms on these fronts will reduce inflation uncertainty and restore a stable business environment. Further lower inflationary expectations would increase domestic household financial saving and make resources available for investment.

Second, public finances need to be put on a sustainable path. India needs sharp fiscal correction, a new Fiscal Responsibility and Budget Management (FRBM) Act with teeth, better accounting practices, greater transparency and improved budgetary management. Improvements on both tax and expenditure are needed to obtain high quality fiscal adjustment. The tax regime must be simple, predictable and stable. This requires a single-rate goods and services tax (GST), fewer exemptions in direct taxes, and a transformation of tax administration. Government expenditure reform involves three elements: shifting subsidy programmes away from price subsidies to income support, a change in the focus of government spending towards provision of public goods, and a focus on outcomes through an improvement in systems of accountability. A focus on health and education outcomes, rather than inputs and expenditure must be a priority. Improvements in credit ratings, lower inflation, lower cost of capital, and greater business confidence that would ensue will yield short-term benefits in response to long-term initiatives.

Third, the government faces the task of putting in place the legal foundations of a well-functioning market economy for India. This must be a carefully executed project as it involves legislative, regulatory, and administrative changes. It involves both removing existing restrictions where there is no market failure and building state capacity to allow businesses to operate in a stable environment. This will help improve the ease of doing business. While product markets have seen reform in India, there is a pressing need to reform factor markets such as those for land, labour and capital. Reforming the financial sector would involve reducing financial repression through which the state usurps a large share of household financial savings, financial sector regulatory reform and changing the laws and regulations governing the flow of foreign capital into India.

Reforming the food market is a huge challenge. Restrictions on farmers to buy, sell and store their produce to customers across the country and the world imposed by Indian laws enacted in the 1950s and 60s have not been removed, even though restrictions on industry were removed long ago. Restoring economic freedom of farmers and allowing them to be part of a competitive national market is essential for controlling food inflation. There is a huge opportunity today for Indian agriculture to be transformed through creation of markets as well as state intervention in public goods such as rural infrastructure and training as well as setting up modern regulatory frameworks for warehousing and commodity futures. Rationalisation of subsidies on inputs such as fertilizer and food is essential. Government needs to eventually move towards income support for farmers and poor households, so that market forces are able to respond to changes in consumption and technology.

GST to be a Major Milestone for Indirect Tax Reform DTC required as a Clean Modern Replacement for existing it laws

In a non-market economy, in addition to laws, taxes and subsidies are used for encouraging or discouraging activities that the central planner considers good for the economy. India’s complex tax system suffers from problems in both structures and administration. Uneven and high tax rates and uneven tax treatment of similar economic activities have induced distortions in the behavior of firms and households. Tax reform in India can improve the ease of doing business and promote efficiency and productivity growth.

There is consensus that the GST will be a major milestone for indirect tax reform in India. Replacing all existing indirect taxes by the GST will create a national market, eliminate cascading taxes, and align taxation of imports and exports correctly. This will improve the competitiveness of production and export from India. The implementation of a Central GST (CenGST) could be the first step towards the GST. Once the CenGST is implemented, and the information technology system for CenGST has worked, estimation risk will be lower and it will be easier for the centre and states to move to the GST.

Just as the GST is a transformation of indirect taxes, the DTC is required as a clean modern replacement for the existing income tax law. As with the GST, the key objective must be a simplification with a clean conceptual core, and the removal of a large number of special cesses and exemptions that favour special interest groups. The tax system must move away from industrial policy, with incentives for one activity or another, towards a simple framework.

As with the GST, the DTC will yield gains by removing distortions of individual and corporate decision making, reducing compliance cost and litigation, and improving tax collections.

The passage of the PFRDA Act, the shift of commodity futures trading, FSLRC report were the three major milestones of the year 2013-14

·         The passage of the PFRDA Act, the shift of commodity futures trading into the Ministry of Finance, and the presentation of the FSLRC report, were the three major milestones of the year 2013-14.

·         In the banking sector gross NPAs of banks registered a sharp increase. Overall NPAs of the banking sector increased from 2.36 per cent of total credit advanced in March 2011 to 4.40 per cent of total credit advanced in December 2013.

·         The RBI has indentified five sectors -- infrastructure, iron and steel, textiles, aviation and mining as the stressed sectors.

·         The New Pension System (NPS), now National Pension System, represents a major reform of Indian pension arrangements, and lays the foundation for a sustainable solution to ageing in India by shifting to an individual account, defined-contribution system.

·         Till 7 May 2014 a total of 67.11 lakh members have been enrolled under the NPS with a corpus of ` Rs. 51,147 crore. 

·          The Swavalamban Scheme for workers in the unorganized sector launched in 2010, has now been extended to five years for the beneficiaries enrolled in 2010-11, 2011-12, and 2012-13 and thus the benefits of co-contribution under the Scheme would be available till 2016-17.

·         The FSLRC in its Report submitted on 24 March 2011 has given wide-ranging recommendations,  broadly in the nature of governance enhancing principles for enhanced consumer protection, greater transparency in the functioning of financial sector regulators in terms of their reporting system, greater clarity on their interface with the regulated entities and greater transparency in the regulation making process by means of mandatory public consultations, incorporation of cost benefit analysis etc.

WPI Inflation Shows Sign of Receding fell to 5.98% during 2013-14 Food Inflation Remains High

Wholesale and Consumer Price Inflation expected to Decline

Economic Survey 2013-14 states that in comparison with previous years, inflation showed signs of receding with average wholesale price index (WPI) inflation falling to a three-year low of 5.98 per cent during 2013-14, compared to 7 and 9% over the previous two years. Consumer price inflation, though higher than the WPI, has also exhibited signs of moderation with CPI (new-series) inflation declining from 10.21 per cent during FY 2013-14 to about 9.49 per cent in 2013-14. Food inflation, however, remained stubbornly high during FY 2013-14, reaching a peak of 11.95% in third quarter.

High inflation, particularly food inflation, was the result of structural as well as seasonal factors. Contribution of the commodity sub-groups, ‘fruits and vegetables’, as well as ‘egg, meat and fish’ to the food inflation has been very high.

Inflation in Non Food Manufactured Product (WPI core) has remained benign throughout the year, with average inflation moderated to four year low of 2.9 per cent in 2013-14, which indicates that underlying pressures of broad-based inflation have somewhat eased.

IMF has projected that most global commodity prices are expected to remain flat during 2014-15, which augurs well for inflation in emerging market and developing countries including India. The WPI inflation is expected to moderate by the end of 2014. However, there are risks to the outlook for inflation from a possible sub-normal monsoon during 2014-15 as predicted by the IMD on account of El-Nino effect, possible step up in the pass-through of international crude oil prices, and exchange rate volatility.

The course of gradual monetary easing that had started alongside some moderation of inflationary pressures at the beginning of the financial year 2013-14 was disrupted in May 2013, following indications of possible tapering of the US Fed’s quantitative easing programme. The RBI with a view to restoring stability to the foreign exchange market, hiked short term interest rate in July and compressed domestic money market liquidity.

Following the ebbing of volatility in the foreign exchange market, RBI initiated normalisation of the exceptional measures in a calibrated manner since its mid-quarter review (MQR) of September 20, 2013. The interest rate corridor was realigned to normal monetary policy operations with the MSF rate being reduced in three steps to 8.75 per cent between September 20, 2013 and October 29, 2013.

RBI in its Third Quarter Review of Monetary Policy on January 28, 2014, hiked the repo rate by 25 bps to 8 per cent on account of upside risks to inflation, to anchor inflation expectations and to contain second round effects. The move was intended to set the economy securely on the disinflationary path.

Liquidity conditions remained tight during the first half (H1) of 2013-14, mainly reflecting policy intent to stabilise the exchange market pressure. The elevated central government cash balances with RBI (particularly in Q2 and Q4 of 2013-14), quarterly advance tax outflows, and festival-induced increase in currency in circulation also contributed towards the tight liquidity phases in 2013-14. In order to prevent excessively worsening of liquidity conditions, which would have impacted financing conditions, RBI undertook measures to inject liquidity through OMO purchase auctions, overnight repo, MSF and variable rate term repos.

External Debt Remains within Manageable Limits

The Economic Survey 2013-14, presented today in the Lok Sabha by the Union Finance Minister Shri Arun Jaitley, has noted that India’s external debt has remained within manageable limits due to the external debt management policy, with prudential restrictions on debt varieties of capital inflows given the large interest differential. India’s external debt stock at end of March 2013 stood at US $ 404.9 billion (Rs. 2,200,410 crore), recording an increase of US$ 44.1 billion (12.2 per cent) over the previous year’s level of US $ 360.8 billion (Rs. 1,844,167 crore). External debt both at end March 2013 and end March 2012 is higher than reported earlier in various publications owing to the inclusion of securitized borrowings of banks as reported by the RBI in its external debt statistics. Component-wise, long-term debt increased by 9.1 per cent to US $ 308.2 billion at end March, 2013 from US $ 282.6 billion at end March 2012, while short-term debt refers to such debt in terms of original maturity unless otherwise stated, increased by 23.7 per cent to US $ 96.7 billion from US $ 78.2 billion at end March 2012, reflecting elevated levels of imports.

Long-term Borrowings Account for 78.2 per cent of Total External Debt
The Economic Survey 2013-14, presented today in the Lok Sabha by the Union Finance Minister Shri Arun Jaitley, has noted that the maturity profile of India’s external debt indicates dominance of long-term borrowings. The long-term external debt accounted for 78.2 per cent of total external debt at end-December 2013 vis-à-vis 76.1 per cent at end-March 2013. The long-term debt at end - December 2013 increased by US $ 25.1 billion (8.1 per cent) over the level at end-March 2013 while short-term debt declined by US $ 4.0 billion (4.1 per cent), reflecting a fall in the levels of imports.

Developing countries must get judicious Carbon and Development Space in new climate deals Human- induced Greenhouse gas emissions are chiefly responsible for climate change

The Economic Survey presented in Parliament says that the global climate community faces a deadline for reaching an agreement in 2015, bringing in more than 190 countries to pledge emission cuts for the post 2020 period. It is important that future agreements should take into account developing countries concerns and requirements fully. The issue of how developed and developing countries will be treated in these global pacts is the most crucial aspect.

New climate deals must ensure that developing countries are granted the required “carbon space and development space”. Governments are currently working on two new agreements on climate change and sustainable development, both of which will be new global frameworks for action to be finalized next year. Following the Rio+20 mandate, the global community is working to develop a set of Sustainable Development Goals (SDGs), possibly to be integrated with Millennium Development Goals (MDGs), when they end in 2015.

The survey notes that Human- induced Greenhouse gas (GHG) emissions are growing and are chiefly responsible for climate change. The world is not on track for limiting increase in global average temperature to below 2◦C, above pre-industrial levels. GHG emissions grew on average 2.2 per cent per year between 2000 and 2010, compared to 1.3 per cent per year between 1970 and 2000.

As far as India is concerned, India’s per capita carbon emissions increased from 0.8 metric tons to 1.7 metric tons in 2010, well below the world average of 4.9 metric tons in 2010. India has already committed that its per capita emissions will not exceed those of the developed countries under any circumstances. India is making progress in implementing national plans on climate change. It has reduced its CO2 emissions per unit GDP by 20 per cent between 1990 and 2011. There has been considerable progress in achieving targets under National Action Plan on Climate Change. State Action Plans on Climate Change for 9 states have been endorsed. The cumulative costs of India’s low carbon strategies have been estimated at around USD 834 billion at 2011 prices, between 2010 and 2030. Even though India has accommodated the sustainability concerns in the development path, it is constrained in its effort, as the magnitude of resources required is very large. Raising new and additional resources for SDGs and the non-capitalization of the Green Climate Fund is a matter of serious concern and may threaten the credibility of the global negotiation process.

The global negotiations provide an excellent opportunity to ensure a fair burden sharing, cooperation between the rich and poor nations. At the heart of this challenge now lies a fair division of global rights and responsibilities. The survey calls for decisive action to achieve the goals of sustainable development and it underlines that the climate deals must ensure that developing countries be given their fair share of carbon and development space.