This Budget, rationalise subsidy burden
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Tuesday February 22, 2011 09:21 pm PSTThe Union Budget 2011-12 is being presented at a time when the Indian economic juggernaut is gathering speed after more than a year of slow growth brought on by the global economic crisis.
In fact, robust economic growth of 8.9% in the second quarter- the fastest in more than two years, a rebound of farm output, a vibrant manufacturing sector performance and services trotting up a growth of almost 10 per cent shows that our economy is in fine fettle. Yet it is equally true that high inflation both in farm and input prices, rising interest costs and widening trade and current account deficit could dampen the momentum of growth. Besides, the prevalent uncertainty in world economic scenario could still affect economic activity in the country.
Against this backdrop the PHD Chamber looks forward to a dynamic Budget, which, through effective policy interventions and reform initiatives, would consolidate the positives thereby paving the way for a return to 9 per cent plus growth in the next financial year. Some measures that would help harness the country's potential and put the economy on the path of sustained growth are mentioned hereunder.
Fiscal Consolidation
Among the most important challenges before the Finance Minster is to ensure that fiscal discipline, undertaken last year, is continued in the forthcoming Budget as well. The forthcoming Budget will have to spell out the medium term strategy for fiscal consolidation to ensure growth. Doubtless, the last Budget has brought fiscal consolidation back on track. What is more, latest figures indicate an impressive performance with fiscal deficit during April-October 2010 accounting for 42.6 per cent of Budget Estimate for the current financial year as compared to 61.1 per cent in the same period last year. Similarly, revenue deficit for the first seven months of the current year stood at 34.3 per cent of the budget estimate of the full fiscal.
Despite this, the combined fiscal deficit of the Centre and the States, estimated at about 8-9 per cent of GDP in 2010-11, is still the highest among emerging markets. Furthermore, the improvement in Government finances at the Centre, as is witnessed during the first six months of 2010-11, is essentially a result of non-tax receipts such as auction of 3G spectrum and better tax collections in a growing economy and is not so much due to a reduction in non-productive expenditure. Hence, while the cyclical fiscal deficit is moderating due to higher economic growth, the structural deficit remains to be tackled through rationalizing expenditure and expanding the tax base. We need to use the growing economy to streamline our fiscal operations.
We believe effective fiscal consolidation would need a medium term plan. No doubt the revenue received from 3G auction would help reduce fiscal deficit this year. But this is only a one-shot option and this windfall will not be available each year for fiscal improvement to be sustained. Hence, an appropriate strategy for sustaining fiscal discipline should be contemplated. Simultaneously, the Government should prune its unproductive revenue expenditure especially on non-merit subsidies as also rationalise the plethora of schemes and programmes and undertake structural reform to reduce revenue expenditure. This will release more resources for private use.
The aim should be to narrow Government's fiscal deficit to 4.8 per cent of GDP in 2011-12 as mentioned in the Budget 2010-11. However, in moving towards lower fiscal deficit, it is important to ensure that the quality of deficit does not suffer and resources are made available for meeting the infrastructure deficit and for funding our enormous education and health needs.
Rationalising the Subsidy Burden
The mounting subsidy burden is posing a threat to containing the fiscal deficit and diverting government finances to more productive use. The decontrol of petrol prices as also the fuel price hike has not done much to reduce the subsidy bill especially as diesel, kerosene and LPG continues to be subsidised. With global crude prices ruling above $ 80 per barrel, the subsidy bill may go up further this year.
Besides, growing fertiliser subsidies and a higher food subsidy bill due to production shortfalls are creating and nurturing distortions in the system. No doubt, the subsidy on food cannot be reduced because it would run counter to the inclusive agenda of the Government. However, much can be done to clean up the public distribution system and eliminating leakages. Major subsidies such as on fertilizer, oil and petroleum products should be reviewed and there is a case for their roll back.
A strategy should be devised to tackle subsidies by effective targeting of fund flow and by improving the delivery of public services including quality of education and healthcare. Some measures required in this direction are as under:
a. Device a strategy to improve the delivery of public services so that subsidies reach the targeted beneficiaries.
b. Raise fertilizer prices at farm gate and bring it at par with market rates.
c. Decontrol fertilizer industry and convert fertilizer subsidy from a part-producer subsidy to a farmer-oriented subsidy with producers being given the freedom to set prices.
d. Diesel prices should reflect market realities and be on par with international prices. Subsidy on kerosene and LPG should be gradually phased out.
e. Replace food, fertilizer and petroleum product subsidies by direct cash transfer to the BPL households.
Focus on Infrastructure Development
Our investment in infrastructure, rightly identified as a priority area, is behind schedule. Poor quality of roads, continuing shortages of power supply and inadequate port and aviation infrastructure adversely affect our competitiveness. The situation is particularly disturbing in the case of power, where the problem of irregular supply and high tariff has assumed gigantic proportions, forcing factories to maintain expensive back-up generation. The country is presently witnessing peak and average energy shortages of about 13% and 10% respectively implying that capacity is well short of the required levels.
Hence the major challenge should be to step up investment in infrastructure - from the present about 7 per cent of GDP to 9 per cent of GDP by 2012 - through a mix of public investment, exclusive private investment and public - private investment in infrastructure. In fact, an appropriate legal, administrative and regulatory framework should be put in place for encouraging public - private partnership and inflow of FDI in infrastructure. Some other measures to overcome our deficiencies in infrastructure are mentioned hereunder.
a. Investor friendly land acquisition policies and bidding procedures are required to encourage the private sector to actively participate in infrastructure.
b. It is reported that there are cost over-runs in infrastructure projects to the tune of Rs. 51,618 crore in 333 ongoing projects accounting for 13.89 per cent of the original approved. Of this, the maximum number of cost over-runs, at 130, is in road transport and highway sector. The overruns could be on account of delay in land acquisition and various clearances required, delay in award of contracts, procurement of equipment, slow resolution of disputes, gaps in technical and managerial capabilities etc. To overcome such problems, the Government should identify 15-20 key infrastructure projects of national importance and gear the administrative and policy mechanism to fast-track their implementation. Adequate capacities need to be ensured so that projects on which money is spent are completed within the specified time frame without cost and time overruns.
c. Infrastructure projects require huge investments and low-cost long tenure finance. Commercial banks face a problem in lending for long-term in view of their asset-liability mismatch and concentration risk concerns. Hence, easier lending norms for infrastructure projects to provide long term access to credit is required along with a vibrant long term debt market and relaxed norms for greater access of pension and insurance funds. In this context the recent proposal to create an India Infrastructure Debt Fund (IIDF) is welcome and must be activated. Suitable changes could also be contemplated in our regulatory mechanism for channelising greater amounts of foreign capital, especially debt capital, into infrastructure to bridge the funding gap.
d. Interest rate on infrastructure projects should not exceed 7-8 per cent.
The Budget should give a further boost to the Bharat Nirman and National Urban Renewal Mission, meant to tackle the problem of grossly inadequate infrastructure through an accelerated programme involving greater outlay and well defined and measurable outcomes.
It is felt that although the allocation for rural electrification has been significantly increased in the last Budget, its pace is still to gather speed. Hence, accent should also be provided to rural electrification and the Finance Minister should provide adequate funds to make electricity available in all the villages across the country.
Source: Capital Market
Tuesday February 22, 2011 09:21 pm PSTThe Union Budget 2011-12 is being presented at a time when the Indian economic juggernaut is gathering speed after more than a year of slow growth brought on by the global economic crisis.
In fact, robust economic growth of 8.9% in the second quarter- the fastest in more than two years, a rebound of farm output, a vibrant manufacturing sector performance and services trotting up a growth of almost 10 per cent shows that our economy is in fine fettle. Yet it is equally true that high inflation both in farm and input prices, rising interest costs and widening trade and current account deficit could dampen the momentum of growth. Besides, the prevalent uncertainty in world economic scenario could still affect economic activity in the country.
Against this backdrop the PHD Chamber looks forward to a dynamic Budget, which, through effective policy interventions and reform initiatives, would consolidate the positives thereby paving the way for a return to 9 per cent plus growth in the next financial year. Some measures that would help harness the country's potential and put the economy on the path of sustained growth are mentioned hereunder.
Fiscal Consolidation
Among the most important challenges before the Finance Minster is to ensure that fiscal discipline, undertaken last year, is continued in the forthcoming Budget as well. The forthcoming Budget will have to spell out the medium term strategy for fiscal consolidation to ensure growth. Doubtless, the last Budget has brought fiscal consolidation back on track. What is more, latest figures indicate an impressive performance with fiscal deficit during April-October 2010 accounting for 42.6 per cent of Budget Estimate for the current financial year as compared to 61.1 per cent in the same period last year. Similarly, revenue deficit for the first seven months of the current year stood at 34.3 per cent of the budget estimate of the full fiscal.
Despite this, the combined fiscal deficit of the Centre and the States, estimated at about 8-9 per cent of GDP in 2010-11, is still the highest among emerging markets. Furthermore, the improvement in Government finances at the Centre, as is witnessed during the first six months of 2010-11, is essentially a result of non-tax receipts such as auction of 3G spectrum and better tax collections in a growing economy and is not so much due to a reduction in non-productive expenditure. Hence, while the cyclical fiscal deficit is moderating due to higher economic growth, the structural deficit remains to be tackled through rationalizing expenditure and expanding the tax base. We need to use the growing economy to streamline our fiscal operations.
We believe effective fiscal consolidation would need a medium term plan. No doubt the revenue received from 3G auction would help reduce fiscal deficit this year. But this is only a one-shot option and this windfall will not be available each year for fiscal improvement to be sustained. Hence, an appropriate strategy for sustaining fiscal discipline should be contemplated. Simultaneously, the Government should prune its unproductive revenue expenditure especially on non-merit subsidies as also rationalise the plethora of schemes and programmes and undertake structural reform to reduce revenue expenditure. This will release more resources for private use.
The aim should be to narrow Government's fiscal deficit to 4.8 per cent of GDP in 2011-12 as mentioned in the Budget 2010-11. However, in moving towards lower fiscal deficit, it is important to ensure that the quality of deficit does not suffer and resources are made available for meeting the infrastructure deficit and for funding our enormous education and health needs.
Rationalising the Subsidy Burden
The mounting subsidy burden is posing a threat to containing the fiscal deficit and diverting government finances to more productive use. The decontrol of petrol prices as also the fuel price hike has not done much to reduce the subsidy bill especially as diesel, kerosene and LPG continues to be subsidised. With global crude prices ruling above $ 80 per barrel, the subsidy bill may go up further this year.
Besides, growing fertiliser subsidies and a higher food subsidy bill due to production shortfalls are creating and nurturing distortions in the system. No doubt, the subsidy on food cannot be reduced because it would run counter to the inclusive agenda of the Government. However, much can be done to clean up the public distribution system and eliminating leakages. Major subsidies such as on fertilizer, oil and petroleum products should be reviewed and there is a case for their roll back.
A strategy should be devised to tackle subsidies by effective targeting of fund flow and by improving the delivery of public services including quality of education and healthcare. Some measures required in this direction are as under:
a. Device a strategy to improve the delivery of public services so that subsidies reach the targeted beneficiaries.
b. Raise fertilizer prices at farm gate and bring it at par with market rates.
c. Decontrol fertilizer industry and convert fertilizer subsidy from a part-producer subsidy to a farmer-oriented subsidy with producers being given the freedom to set prices.
d. Diesel prices should reflect market realities and be on par with international prices. Subsidy on kerosene and LPG should be gradually phased out.
e. Replace food, fertilizer and petroleum product subsidies by direct cash transfer to the BPL households.
Focus on Infrastructure Development
Our investment in infrastructure, rightly identified as a priority area, is behind schedule. Poor quality of roads, continuing shortages of power supply and inadequate port and aviation infrastructure adversely affect our competitiveness. The situation is particularly disturbing in the case of power, where the problem of irregular supply and high tariff has assumed gigantic proportions, forcing factories to maintain expensive back-up generation. The country is presently witnessing peak and average energy shortages of about 13% and 10% respectively implying that capacity is well short of the required levels.
Hence the major challenge should be to step up investment in infrastructure - from the present about 7 per cent of GDP to 9 per cent of GDP by 2012 - through a mix of public investment, exclusive private investment and public - private investment in infrastructure. In fact, an appropriate legal, administrative and regulatory framework should be put in place for encouraging public - private partnership and inflow of FDI in infrastructure. Some other measures to overcome our deficiencies in infrastructure are mentioned hereunder.
a. Investor friendly land acquisition policies and bidding procedures are required to encourage the private sector to actively participate in infrastructure.
b. It is reported that there are cost over-runs in infrastructure projects to the tune of Rs. 51,618 crore in 333 ongoing projects accounting for 13.89 per cent of the original approved. Of this, the maximum number of cost over-runs, at 130, is in road transport and highway sector. The overruns could be on account of delay in land acquisition and various clearances required, delay in award of contracts, procurement of equipment, slow resolution of disputes, gaps in technical and managerial capabilities etc. To overcome such problems, the Government should identify 15-20 key infrastructure projects of national importance and gear the administrative and policy mechanism to fast-track their implementation. Adequate capacities need to be ensured so that projects on which money is spent are completed within the specified time frame without cost and time overruns.
c. Infrastructure projects require huge investments and low-cost long tenure finance. Commercial banks face a problem in lending for long-term in view of their asset-liability mismatch and concentration risk concerns. Hence, easier lending norms for infrastructure projects to provide long term access to credit is required along with a vibrant long term debt market and relaxed norms for greater access of pension and insurance funds. In this context the recent proposal to create an India Infrastructure Debt Fund (IIDF) is welcome and must be activated. Suitable changes could also be contemplated in our regulatory mechanism for channelising greater amounts of foreign capital, especially debt capital, into infrastructure to bridge the funding gap.
d. Interest rate on infrastructure projects should not exceed 7-8 per cent.
The Budget should give a further boost to the Bharat Nirman and National Urban Renewal Mission, meant to tackle the problem of grossly inadequate infrastructure through an accelerated programme involving greater outlay and well defined and measurable outcomes.
It is felt that although the allocation for rural electrification has been significantly increased in the last Budget, its pace is still to gather speed. Hence, accent should also be provided to rural electrification and the Finance Minister should provide adequate funds to make electricity available in all the villages across the country.
Source: Capital Market
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