New Delhi, June 17: As finance minister Pranab Mukherjee gets ready to leave the North Block later this week, his successor will be confronted with five critical tasks initiated by him — cut subsidies to reduce expenditure; fast-track FDI reform to bring in hard currencies; insurance and pension reforms; get infrastructure spending to deliver the goods; and kickstart tax reforms through goods and service tax (GST) and the direct taxes code (DTC).
Regardless of whether the job is taken up by Prime Minister Manmohan Singh, aided by his two trusted lieutenants — C. Rangarajan, the former RBI governor, and Montek Singh Ahluwalia, plan panel deputy chairman — or by a politician such as home minister P. Chidambaram or commerce minister Anand Sharma, these five jobs are crucial to India’s future economic course.
Mukherjee has been working with states to make them give tax concessions on petrol and diesel and match the reliefs by a similar cut in central taxes, thereby reducing the government’s fuel subsidy burden.
State levies on petrol and diesel range from 15 per cent in Puducherry to 33 per cent in Andhra Pradesh. Karnataka, Maharashtra, Tamil Nadu and Bengal also have high fuel taxes. Besides, the taxes are ad valorem, meaning the amount goes up with the prices.
Mukherjee wanted states to cut taxes by up to 25 per cent. The bold measure requires adroit political manoeuvring to get off the ground. It needs immense back-room bargaining with states led by the Opposition parties. If the plan works, it will result in less subsidy for the Centre.
The Centre needs to cut subsidies on diesel as the wide fluctuations in crude prices can derail its subsidy bill, which has been budgeted at Rs 190,000 crore for the current fiscal. This amount is meant for food, fertiliser and fuel. However, fuel subsidies have risen so sharply that they could eat up almost the whole of the planned amount, leaving little or nothing for the other items.
Urea subsidy is another area the new czar at North Block will have to train his guns on.
A bizarre happening at last week’s Cabinet meeting is reported to have put off moves to hike urea prices. The junior minister for fertiliser had reportedly crossed swords with his boss to stall a hike at the meeting.
Increasing urea prices every year for the next three years and eventually introducing free pricing in fertilisers will help the government to check its huge subsidy bill and also save farms from being turned into wastelands by the overuse of heavily-subsidised urea.
The depreciation of the rupee, which has lost around 24 per cent of its value in a year, is snowballing into a major area of concern. Though India has one of the largest forex reserves, it needs to shore up its investment as a large part of the foreign exchange is in the form of debt.
To bring in a fresh wave of investment, the government wants to not only open up FDI in retail, defence and aviation but also revive the stalled pension and insurance reforms.
Possibilities in insurance
Even if the FDI cap on insurance can’t be raised because of political compulsions, Mukherjee’s other proposals on insurance can lift the market sentiment and rake in hard currency. Chief among the reforms is to allow Lloyd’s to open a trading floor in Mumbai, permit foreign reinsurance firms such as Swiss Re and Munich Re to enter India and give a green signal to public non-life insurance companies to raise capital by selling minority stakes.
Earlier this month, the Prime Minister had held a meeting of infrastructure ministries to try and push them into meeting their spending commitments. But in truth, this job is done best by two people – the finance minister, who holds the purse strings and sits in on all meetings on permission for projects, and by the Planning Commission deputy chairman, who appraises the projects. To rev up growth it is just as important to spend money on catalytic projects as it is to stop spending on wasteful subsidies.
Implementation of the goods and services tax will be on the top of any finance minister’s priorities. This tax reform measure, which will help to unify India’s markets and increase its GDP by 1-1.5 per cent, has been held up because of opposition from BJP-ruled states and to an extent by Bengal.
The direct taxes code, will, however, be a simpler task as most of the hard work has already been put in by Mukherjee’s team and now just requires some finetuning.