Pre-Budget memorandum of PHD Chamber of Commerce and Industry (PHDCCI)

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Interim Budget Special | 12 Feb, 2009
ECONOMIC OVERVIEW

Introduction:
There is a growing realization that after having experienced an unprecedented growth rate of over 9 per cent in the last four years, our economy has started losing steam. The global imbalances arising out of high fuel and commodity prices have worked their way to impact key segments of our economy. What is more, even before our economy has fully recovered from the fallout of imported inflation, our economy has had to grapple with the repercussions arising out of the ongoing financial turmoil in the USA. It is against this backdrop that the need for bold policy measures and reform initiatives, which could rekindle business confidence and play a crucial role in defining our growth trajectory, assumes special significance.

Indeed, recent data indicates that there are signals of a slowdown in growth. Indeed, our second quarter GDP growth at 7.6 per cent is much slower than that experienced last year. The performance of the industrial sector and exports are also not too encouraging. Besides, high interest rates, inadequate credit availability, volatility in the stock markets, falling rupee among others, are creating uneasiness in the marketplace which could have a definite fall-out on growth. Such apprehensions are heightened by the uncertainties in the global economy, particularly as the second round effects of global meltdown are pointing towards more difficult times for the economy in the year ahead.

In such a situation the Chamber looks forward to a dynamic Budget which not only takes a proactive stance to keep the growth momentum going but also sends out a strong message that the Indian economy is relatively insulated from global factors. Some of the measures that would stimulate the domestic drivers of growth and put our country on the path of sustainable development are mentioned hereunder:

Inculcating Fiscal Discipline:
There is an emerging consensus that, after four years of fiscal consolidation by the government, the fiscal position has started becoming increasingly shaky and is likely to be compromised this year, owing partly to our response to external factors as the government is forced to spend more to avert the impact of global economic slowdown as also due to the runaway oil subsidy bill, farm loan waiver, sixth pay commission award etc. As a result the real fiscal deficit could overshoot the Fiscal Responsibility and Budget Management (FRBM) target of 2.5 per cent for 2008-09 and could threaten to reverse the hard earned gains on the fiscal front. India’s gross fiscal deficit of the Centre and States, according to the Prime Minister’s Economic Advisory council, is slated to be around 10 per cent of GDP. Many private forecasters project the deficit to be much higher. Such a high deficit has reduced the fiscal space available to the government to undertake crucial investments, especially in the much needed areas of infrastructure, education and health which are crucial to rekindle growth in the economy.
Given the large negative consequences of high fiscal deficit for the macro economy, it is imperative that the government should undertake both expenditure and tax reforms in a focused manner to address the deficit without compromising on outlays for physical and social infrastructure. At the same time it is important to re-direct expenditure, cut back on non-merit subsidies, such as those on petroleum products, even while raising merit subsidies, such as primary education. Keeping a tab on expenditure is especially important as revenues could show signs of slowdown due to a moderation in economic growth this year. It is also important to bring government finances back on the track of fiscal consolidation once there is an improvement in economic conditions as a higher fiscal deficit might create a crisis in the medium term.
The government should also include off-budget items such as oil, food and fertilizer bonds into the budget so that there is transparency over the true extent of fiscal balance in the country.

Focus on Infrastructure:
In the prevailing scenario of continuing economic slowdown, the immediate challenge is to revive demand through major expansion of public investment in infrastructure including early completion of projects under the National Highway Development Project, most of which are behind schedule. The implementation of projects in sectors like roads, ports and electricity sectors should be carried out on a fast track. This is necessary not only to keep up aggregate demand but also to address infrastructure bottlenecks.

There is need to step up investment in infrastructure - from the present 4.6% of GDP to 8 per cent of GDP during the Eleventh Plan – 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. Investor friendly land acquisition policies and bidding procedures are required to encourage the private sector to actively participate in infrastructure. The government should also contemplate leveraging our foreign exchange reserves to fund infrastructure especially as FDI flows in infrastructure are getting affected by the financial turmoil in the USA.

Besides, the endemic power shortages, wherein peak shortage has increased from 11.4 per cent in 2004-05 to 18.1 per cent in 2008-09, and high tariffs increase the cost of operation in industry which is already reeling under the effects of a slowdown.

To ensure the energy security of the nation, the Budget should also consider incentivising production and research in fuels of future, including renewable energy (wind, solar and bio-energy), coal bed methane, underground coal gasification, nuclear energy, gas hydrates, biofuels, etc. to supplement the conventional sources as well as protect environment.

The Budget should give a further boost to flagship programmes like Bharat Nirman to provide a boost to rural infrastructure. In fact, evidence shows that though Bharat Nirman had promised assured irrigation to an additional one crore hectares, only 38 lack hectares have received the benefit by the end of the last fiscal year. Similarly, only 45,000 of the total 1,25,000 targeted villages have been provided electricity so far

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. About 80,000 villages are yet to be electrified and even where villages are electrified, the power availability is poor. 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.

Similarly, the National Urban Renewal Mission, meant to tackle the problem of grossly inadequate infrastructure in the urban areas, should be put on the fast track through an accelerated programme involving greater outlay and well defined and measurable outcomes. The Budget should also encourage the building of as many world class cities as possible and connect these cities with the villages through a system of inter-connected roads.

Developing social Infrastructure:
Apart from building physical infrastructure, it is also important that social infrastructure such as education and health are provided adequate attention in order to create human capital which would play an indispensable role in sustaining economic growth and prosperity at the grassroots level. This makes it imperative to achieve and sustain 100% literacy and ensure that every citizen has access to health care. Hence, the priority in the Budget should be to augment investment in social infrastructure – particularly in the twin merit goods of education and skill development and basic health and safety - in order to improve the quality of life of our populace, create a momentum of local prosperity and make people partners in progress.

It also needs to be recognised that better utilization of allocated funds, through effective delivery mechanisms, should be an essential component of the developmental objectives of the Union Budget in order to fulfill the long term priorities of development. To avoid duplication of investment for the same target group, it is also suggested that schemes announced in the Budget for social projects like education and health are in sync with existing schemes in the area.

Focus of Skill Development:
In order to sustain the resurgence in the economy and in labour – intensive manufacturing and services sectors as also to reap the dividends of our demographic advantage, it has become crucial to bring more and more of our labour resources in the production chain by improving the skill sets in the economy.

The Budget should urgently attend to mismatch in demand and supply of high quality professionals in the country. For this, there is a need for a well defined plan in education to promote skill and talent. It is important that the vocational education system including ITIs as also institutions of higher learning should be made responsive to industry needs and aspirations. It is recommended that universities and colleges be provided greater fiscal and managerial autonomy. Besides, there is need for a radical re-look at education policy with accent on quality and rise in investment. A substantial part of this will have to come from the Government and it is hoped that the Budget will reflect this critical need.

Stepping up Investment in the Agriculture Sector:
It is generally conceded that the market forces which have revolutionised Indian industry in the post-reform period and made it globally competitive must now be allowed to transform the agriculture sector which has so far been bypassed by the reforms agenda. There is an urgent need to step up capital investment in agriculture particularly in areas like operation and maintenance of irrigation system, watershed development, rural infrastructure, cold chains drinking water, housing and sanitation. This would raise productivity of Indian agriculture and help in promoting rural and urban prosperity.

The importance of research and extension services in augmenting agricultural productivity cannot be understated. Hence, funds should be allocated for location specific agriculture research which has assumed special importance in view of high variability in our agro-climatic conditions.

Rationalisation and Simplification of our Present Tax System:
Industry contends that our present tax rates too high as compared to international standards, which raises the cost of production in industry. In fact, a study shows that the prices of manufacturing goods in India is, on an average 28-33 per cent higher in India as compared to China, half of which could be attributed to the difference in indirect tax levels.

Such a finding is also corroborated by our members who find that for items such as consumer electronics and durables, the overall incidence of indirect taxes is close to 30 per cent which is much higher than Thailand where VAT is only 7 per cent and China where VAT is 17 per cent. The cascading domestic taxes as also the tax barriers created through central sales tax are making indigenous goods non-competitive even for products where we enjoy a competitive advantage. Besides, there is need to stimulate demand in the economy by undertaking industry friendly fiscal measures such as the following:

Introducing investment allowance
Abolishing dividend distribution tax
Doing away with MAT
Lowering corporate tax to 20%
Abolishing FBT
Introducing voluntary disclosure of income scheme(VDIS)
Effecting across the board reduction in VAT by 2%.
Designing special package for sectors such as exports and real estate, SMEs among others as a confidence building measure for industry.

Such measures would help stimulate growth which, in turn, would generate revenue for the government.

In this regard, it is also imperative for the government to stick to its target of abolishing the central sales tax by 2010 and introducing a uniform GST that would subsume service tax and excise with a plethora of state taxes. Besides, VAT should be converted into a genuine destination based tax that tracks inter-state sales and provides refunds. This would help promote domestic manufacturing and industry and help them compete with other countries in the international market.

There is also a need to abolish the inverted duty structure, wherein inputs attract a higher duty than finished goods and rationalize the customs duty in order to promote domestic value addition. The priority in the Budget should be to address and remove this anomaly and ensure that customs duties on inputs are not higher than that on finished products. This would provide larger benefits of FTA to domestic industry.

Incentivising Research and Development:
At a time when successful enterprises globally are knowledge based, it is important that industry in our country is incentivised to affect continuous product and system innovation and achieve excellence in performance through a focus on technology and R&D.

However, in our country the tax rebate works out to be 7-8 per cent through a 150 per cent weighted deduction. Hence, to begin with, the Budget should consider providing a weighted deduction of 200% for investment in R & D. It must be borne in mind that R & D subsidy up to 50 per cent of project costs are non-actionable under WTO.

Similarly, in order to strengthen the technological capabilities of our country, it is suggested that income tax deduction, customs duty exemption and also specific subsidies should be provided to companies, especially in the small and medium sector, for acquisition of advanced technologies and for undertaking technology up-gradation. The government should also consider, on a priority basis, the creation of a technology acquisition fund for small and medium enterprises and for strategic manufacturing sectors such as aerospace, shipping, IT and electronic hardware, capital goods, solar energy, among others as each of these segments would need a dedicated fund for acquiring technology for adding value to their product.

Reviving Disinvestment in non- Strategic Public Sector Units (PSUs):
The disinvestment programme of the government, which has been on the backburner for the past four years, should be fast tracked. The government should complete the process of selling 5-10 per cent equity in profit making non navratna PSUs like NHPC and Oil India. In fact, the government should commence disinvestment or partial sale of equity of most of the non-strategic PSUs. In the remaining units, the government should give maximum operational and financial autonomy to let them face competition. This would usher in and greater management accountability among PSUs. Such a move would boost business confidence, revive the stock market, infuse funds for expansion and modernization of PSUs and provide funds for improving social infrastructure.

The Budget must also offer more incentives to maintain or even augment domestic savings from the present level. Indeed, at a time when global economy is slowing down and there is uncertainty on whether foreign funds flow would continue at the same rate as now, it is important that ways and means be adopted so that savings do not go down from the present level. Deepening the capital market as well as introducing safe and innovative savings schemes could offer alternative avenues for investment and thus provide incentive for savings.

CONCLUSION
To conclude, the Chamber hopes that the Budget would continue to formulate growth-oriented policies adopted over the years while seeking to address certain challenges that serve to impede our growth process. A political consensus towards speedy and purposeful implementation of the reform agenda would help us to tide over the travails which are presently bedeviling our economy.