The Associated Chambers of Commerce and Industry of India

ASSOCHAM Corporate Office:

ASSO'CHAM
IN D I A

1, Community

Centre, Zamrudpur, (Hunting

Kailash Colony, New Delhi-11 0048

Tel: 011 46550555

Line) Fax: 011 46536481/82,46536498 Website: www.assocham.org

Email: [email protected]

28 February,2012

ASSOCHAM Prescription for Fiscal consolidation*

With promise economicper cent todecelerating from the of nine growth mere seven per

the or budget's cent lasteven less,

the country is looking forward to the forthcoming budget to restore the growth expectation to at least nine per cent in the year 2012-13 (fiscal 13). This coming fiscal year not only marks the beginning of the 12th Five Year Plan, it also is the inflection point for the UPA-2 before the electoral test of 2014. As Dr. C. Rangarajan said in his ASSOCHAM Foundation Day lecture only a few days back calling for a return to 8to 9 per cent growth over the next two decades: "This is necessaryto raise the living standards of our population substantially." We, in ASSOCHAM, fully agree with the eminent economist who chairs the PM's economic advisory council that "growth must lead to reduction of poverty. It must be broad based to include all segments of society." Hence any agenda that calls for a halt to direct poverty alleviation measures is not acceptable to us. We believe that the entire debate of growth vs poverty alleviation is irrelevant; the public discourse should be on how the growth could be raised to at least nine per cent if not more and also bring tangible and lasting benefit to the marginalized.

*The Views have been submitted to the Competent Authorities

ASSOCHAM Prescription for Fiscal consolidation

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It is plain as daylight that only growth could bring in the resources for

the Central and State Governments to fuel their social capital formation including programs for immediate relief of distress. The Central Government could launch employment entitlement scheme costing Rs. 40,000 crores

this year and raise grants to states in the three years ending 2005-06 by 32 per cent and ten per cent in 2010-11 mainly because of the increase in its revenue. Business cannot ignore the ground situation in major parts of the country that has enabled destructive forces to challenge law and order. That a convincing program of bringing the benefits of development in so far neglected areas, can wean people away from such forces is clearly the message when as much as 70 per cent of the electorate queue up for voting in the panchayat elections in these areas. ASSOCHAM supports Government's agenda to ensure food security to the

vulnerable sections of society. The question is how to do this without predicted widening

of the fiscal deficit on top of the already severe stress

in this vital criterion of financial health of the economy and government. To quote Dr. Rangarajan again: requisite for sustained growth." Fiscal deficit has risen in the last five years ending 2010-11 by 30 per cent and this year it is expected to be still higher than what was promised in the budget. It is expected to be six per cent of the GDP as against the promised 4.6 per cent. Revenue-expenditure terms widening gap is stated to be 80 billion in US dollar
If

fiscal consolidation

is a necessary pre-

by 25 per cent. Many other indicators are also alarming,

especially in the context of need to curb inflation. If prices rise particularly in the daily items of need, the impact on the low income groups is more

ASSOCHAM Prescription

for Fiscal consolidation

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than on the others. Government's

borrowings

from the market have risen

to about Rs. one lakh crores the gross market borrowings over the budget level, from 12 per cent to 32 per cent (between decade ending 1991 and five years ending 2010-11) and would be even more this year. (Please has risen

check figure for this year). Short term debt of the Government

from 12.9 per cent of the forex reserves to 21.2 per cent between 2006 and 2011 and FDI/FII investment flow is volatile. Though the forex reserve of around 300 billion dollars is reassuring and export growth encouraging, has been

imports have also grown and the current account deficit is a

matter of concern. Dr. Rangarajan has said "efforts must be made to keep the current account deficit (in 2011-12) around the manageable level of 2.5 per cent of GDP." The concern is fully borne out by the fact that in April-Jan trade deficit was as high as 148.7 billion dollars. In January exports rose by 10.1 per cent but imports rose by almost double of that at 20.3 per cent. It is encouraging to be told by no less than the Commerce Secretary himself

that exports for the full current year would be around international the target of 300 billion dollars but in the context of the

economic situation FY 13 exports may be "tough",

he says. So

there has to be special attention to prevent a larger trade deficit exacerbate threaten the level of forex reserves and together with other factors add to the financial situation. IT industry is a big source of forex earning but we

have to watch for the impact of President Obama's policy of discouraging outsourcing on these earnings in the coming fiscal. The concern is even

more in the context of rising oil prices. If they rise above the 110 dollars a barrel current level as the West Asia situation deteriorates, the trade deficit is bound to balloon. We are advocating Government gathers enough

ASSOCHAM Prescription for Fiscal consolidation

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political courage to align domestic oil products price to international price of oil if not in one go at least step by step. Otherwise the subsidization of domestic prices of oil products, especially diesel will add to the already huge fiscal deficit and fuel inflation further wiping out even the small gains we see in the economy lately at the turn of the year. The challenge in the forthcoming budget is to contain the fiscal deficit and yet keep the social capital building accelerating. Though the two aims appear contradictory, they need not be so as social spending for job entitlement and food grain entitlement need not be seen as opposed to fiscal consolidation. ASSOCHAM does not agree with those who advocate giving up social spending to facilitate fiscal consolidation. On the contrary we want Government and businessto jointly explore how the two apparent contradictory aims of fiscal consolidation and social entitlements could be advanced starting from FY 13. Food and employment security properly administered could curb social unrest. No growth could be expected to be smooth even if enough funds are available if it is sought to be built over a base where a third of the population is below the poverty line. If the Govt in reality is able to take care of the basic needs and enterprise extends participation to the marginalized, it could act asa stimulant of growth as Prof.C.K.Prahlad, the late Michigan businessguru, has argued in his famous treatise "Fortune at the bottom of the pyramid".

Controlling the fiscal deficit:

A550CHAM Prescription for Fiscal consolidation

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even to potentially revenue earning government undertakings, huge grants to some states to tide over their fiscal deficits, interest payments and other items. In 2008-09 the fiscal deficit was six per cent of GDP. It rose to 6.4 per cent next year. The promise that it would come down to 4.6 per cent in the current year is not going to be achieved. As this phenomenon intensifies the credibility of the government in managing the economy falters and the business confidence erodes as well as inflationary pressures increase. ASSOCHAM would like to put forward some bold and practicable measures to control the fiscal deficit. We may point out that the signs of revival in the economy like the continuous deceleration in inflation level in December and January, Prime Minister's intervention to de-bottleneck the infrastructure growth, the distinct possibility that the Euro-crisis would be overcome, are all encouraging. But the opportunity they provide should not be lost by hesitations and lack of political will to reverse the widening of the fiscal deficit and improve confidence level of investors in the economic management. It is l .50 worth noting that the RBI has indicated that in the absence of creulole fiscal consolidation it would not be able to take the next important step in promoting growth - namely reduction of interest rates. So fiscal consolidation is at the crux of the coming budget. Our suggestions: 1. Immediate reduction of Rs. One lakh crore in the subsidy bill of the Centre through calibrated return to market pricing of oil products, more especially diesel and petrol. The possible inflationary impact of higher diesel prices would be offset over the months by forcing more economic use of diesel. It would also force switch to alternate energy sources where they are available - so long as domestic prices of diesel

ASSOCHAM Prescription for Fiscal consolidation

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are artificially

kept far below international

price, the substitution

of

this fuel by non-conventional

sources would not take place and oil

import bill would continue to rise. Also within alternate use of diesel, the more economic use would not be promoted if diesel prices are low - rail transport of goods is more economical than road transportation, for instance, but nearly 60 per cent of the goods freight is by road. 2. Revisit the large items that have raised the revenue forgone to Rs. 5,11,630 crores (6.5 per cent of GDP). There should be scope to

rationalize this list and save at least Rs. one lakh crores out of it. The import duty reduction in terms ofWTO and other trade pacts obligations may be difficult to be reversed but domestic industry is suffering due to significantly cheaper imports of finished goods. The recent decision to impose 19 per cent import duty on power equipment imports is a

point worth further follow up in other areas. The entire range of import duties could be reconsidered to find out where the duty structure is hurting Indian manufactures vis-a-vis imports or where there is no compared to their nearest

level playing field for Indian manufacturers competitors 3. abroad.

The Finance Ministry consolidation additional

is stated to have begun a process of fiscal

and has indicated to the Planning Commission that the

Gross Budgetary Support should be limited to Rs.50,OOO

crores. However with demands from even revenue earning departments like the Railways for steeply higher GBS, how could 4. this desirable consolidation departmental undertakings be achieved? One way would be for

like Railways to widen the scope for PPP

and also consider outright sale of assets that they are unable to utilize

ASSOCHAMPrescription for Fiscal consolidation

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fully. By sale of space in railway stations in key metros, large cities and railway junctions, the Government could raise another Rs One lakh

crores right away within the coming fiscal year. Just consider at least 10 such stations whose available space could be auctioned each for Rs. 10,000 crores as upfront charges with revenue sharing in future through JVs or fully private sector companies. Railways have land other than stations which it could dispose of. It could also consider shifting some of the workshops and other entities that exist within heart of

metros and large cities and then selling off the precious land through auctions to raise funds for railways own modernization rather than calling for larger GBS. 5. The State Governments are chafing at too many Central schemes being loaded on them. Let them devise their own schemes if they so desire within the larger Plan macroeconomic framework provided they find and expansion

the finances for it themselves. This may reduce the pressure of States for larger and larger financial assistance. 6. The Centre must convince the States that are reluctant to allow GST that such unification of taxes could accelerate business across the

nation and bolster the total tax kitty from which they too could benefit. That promotion of trade and investment would not be come if each taxes and thus there is a natural adjusting their own tax

State has its own way in determining

limit to moneys they could earn through

rates up or down. Introduction of GSTfrom this June if not April

should be a national commitment. The budget should also see implementing of DTC thereby improving business environment both ways.
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7.

FDI flows and Infrastructure billion dollars in investment

investment: The 11th Plan target of 500 in infrastructure is largely going to be

achieved. This is to be doubled in the 12th Plan. For this to happen

the constraints to FDI flow. 8. Should be removed during FY2013 - in other words the second phase of economic reforms must start with April 2012. The
ideological hang over in some states about FDI in retail is an injury they are inflicting on themselves and on the people. For, unless there is massive investment in intelligent supply chains the huge difference between farmgate prices and consumer prices of agricultural products will not be narrowed. This is as much a political game that the Centre has to playas an economic necessity.

Consider the areas where serious problems offinding the required level of investments are preventing inflow of FDI. Railways, Civil Aviation, National Highways program, for instance. The trillion dollar infrastructure program should not be allowed to be held to ransom by outmoded fears and ideologies. The rules of the game have changed with globalization as the new reality.
9. The reported enthusiastic response to the Centre's move to sell 5 per

cent of its stake in ONGC and the emerging response to the 2G radio waves auction by foreign companies should promote Government

to raise significant Navaratnas should

capital from FDI and stake sales of public sector like BHEL. At least Rs.70,OOO crores in FY 13 rather than the more

and Maharatnas

be the minimum

target

ASSOCHAM Prescriptionfor Fiscalconsolidation

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conservative Rs.50,000 crores. The Govt. could take advantage of foreign capital seeking new geographies for investment due to the Euro crisis and large cash reserveswith both private and public sector companies lying idle. 10. Widen tax base: Tax revenue as per centage of GDP is only 10 per cent in India but is above 15 per cent in South Korea, Malaysia and Thailand - all fast growing economies. Evenin Indonesia it is higher at 11.4 per cent. Only in Bangladesh and Pakistan is it lower than India. Only 34 million is the number of assessesin a population of 1.2 billion. There is scope for widening the tax base. This needs to be explored. 11. The new projects that need high subsidies could be introduced in phases so that the total subsidy for FS 13 and FS 14 could be far lower than the current estimates- food security is expected to cost Rs. 60,000 crores but could be higher if all the incidental costs like storage and distribution and the perennial drain through corruption could be rationalized. The advice to the Govt. that it should

abandon the food security and other inclusion programs is a search for desperate remedied but ASSOCHAM believes that the administrative challenge of food security could be met if it is introduced in phases and reformed as we spread it throughout the country in the next five years. This could also reduce the subsidy needed right away.
12. Instead of bailing out the civil aviation companies with huge upfront payments, Govt. could help early and easy flow of FDI into them upto a limit.

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13. The centre should set up administrative indices for ensuring better utilization of every rupee spent. The Ministries asking for more GBSs should be told that they must prove better utilization of funds. There has to be an induced growth of efficiency so that every rupee is

better utilized. This would reduce the need for more GBS. 14. The tendency in the States to introduce their own social programs that cost the exchequer heavily without finding any countervailing resources must be curbed through a carrot and stick policy. The large number of schemes for free supply of power as well as reluctance to restructure state electricity boards or in any manner improve their finances, is a case in point. The states also introduce ultra low cost food grains for their own defined BPLfamilies and then run huge deficits. West Bengal, Punjab and Kerala are among such states. The combine fiscal deficit was pegged at 3.54 per cent of their total State GDP in the budget for 2011-12 but is stated to have gone up substantially. The States demand that the centre bail them out as is happening in West Bengal where pension alone is stated to suck Rs 30,000 crores out of the revenue. There could be no fiscal prudence of the States and centre do not find a way out of it and states always demand that the centre bail them out of the consequences of their profligacy. With these measures it should be possible to bring down fiscal deficit. The very initiation of such measures would send out the message that the Government is serious about economic reforms and fiscal

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prudence even as it plans to spend more money in pursuance of the ambitious 12th Plan projects.
One emerging area of concern is the State Governments trying to block many desirable reforms. Their opposition to FDI in retail derailed the

Centre's move in that direction. If regional parties edge out national parties at state polls this resistance is likely to harden. This development poses a

serious challenge to the national economic policies. Regrettably even some national parties instead of smelling the dangers in this shift of power from the Centre to the States, are only willing to take political advantage of it by siding with the recalcitrant regional satraps. Development is not a centre

versus state matter but Centre as well as State matter. Only national policies will take India forward at the high table of the emerging global community. This must be clearly understood as a sine qua non of a prosperous future. Though there is need for reducing expenditure to narrow the fiscal deficit, theprovision for food security across the country is in principle a move

that could be a change agent. We in Assocham believe that the proposed entitlement for food grains at ultra low cost to a majority of the population

could make a significant difference to social unrest by ending hunger. The main criticism of the proposal is that the cost of such food security could run far beyond the Rs 60,000 crores annually envisaged in the bill now before Parliament. It is possible tht the cost will overshoot the estimate by a wide margin. But against this possible high expenditure must be balanced the

likely impact on social unrest if the program is effectively implemented. There is as yet no definite data on the number of the people below poverty line or even where the povety line should be drawn. But that should not prevent

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us from programming immediate relief for the sofcially and economically disadvantaged. Even the United States despite its per capita income of 40,000 dollars has a good proportion of its population depending upon food stamps. Government will have to design the food security programm such a way that the people are convinced that it would be effectively implementd and leakages would be bare minimum. If that is done, public support for the scheme is bound to be widespread. Also the program could be caliberated in the first phase to the most distress ridden districts to begin with and scaled up over three to four years to the entire country. If no one need go to bed hungry, that would be a great achievement and reduce pressures for social violence. The resultant cost savings in maintaining law and order would more than justify the program. Assocham is willing to assist the Government in this by bringing the enterprenurial expertise in designing a fool proof and effecive administration of the scheme.

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A550CHAM Prescription for Fiscal consolidation