New Delhi: Stressing the need for reforms and tough measures to revive growth, finance minister P. Chidambaram said he would try to accelerate the process of moving to a single goods and services tax (GST), flagged the start of the government’s disinvestment programme with a share sale in Rashtriya Ispat Nigam Ltd (RINL), and announced the coming of a “credible and feasible” fiscal consolidation policy.
The moves, which are aimed at boosting investor sentiment and improving the business climate in India, are in keeping with measures announced by the government in recent weeks.
Prospects for a quicker implementation of the single GST brightened with the finance minister scheduling a meeting with Sushil Kumar Modi, head of a panel of state finance ministers, on 22 October to discuss a broad framework for enabling the legislation and to smooth out disagreements between the Centre and the states.
Chidambaram’s announcements came in his speech during the annual economic editors’ conference.
“The push for passage of the GST Bill is a step in the right direction. It will help reduce transaction costs and facilitate easier movement of goods,” said Krishnamurthy Subramanian, assistant professor of finance at the Indian School of Business. “With not much time left for the UPA (United Progressive Alliance) government, it may be hoping for some positive steps to translate into some vote share as well.”
A general election is due in 2014, and two key states, Gujarat and Himachal Pradesh, go to the polls this year. In what can be seen as an acknowledgement of electoral concerns, Chidambaram ruled out a complete phase-out of fuel, food and fertilizer subsidies. “Subsidies cannot be wished away. They can only be rationalized and their delivery made better,” he said.
India had budgeted a fiscal deficit of 5.1% of gross domestic product (GDP) in the current fiscal year, but it is likely to overshoot the target with revenue from tax collections and disinvestment expected to fall short, and expenditure, mainly subsidies, exceeding the budget estimates. The Vijay Kelkar committee, appointed shortly after Chidambaram took over as finance minister in August to suggest a path for fiscal consolidation, has warned that the fiscal deficit could increase to 6.1% of GDP if the government doesn’t reduce its subsidy bill.
The finance minister also hinted at some legislative changes in the winter session itself to undo some of the tax proposals, including the retrospective amendments to tax laws, made in the budget.
The government had set up a committee under Parthasarathi Shome, a former adviser to the finance minister, to look into tax proposals, such as general anti-avoidance rules and retrospective amendments to laws, to bring overseas share transfers under the tax net if the underlying asset is in India. The Shome committee submitted its report to the finance minister last week.
“Once we take a view (on the Shome committee report), I see no reason why we should wait for the budget session. We should move whatever changes have to be brought about in Parliament as early as possible,” Chidambaram said.
The tax proposals had evoked protests from foreign investors and raised doubts about the stability of the country’s tax regime.
“These regressive measures had generated a lot of heat. It is best they are rectified at the earliest,” Subramanian said.
Chidambaram stressed the need for improving capital flows into India to provide a cushion against the falling rupee and the rising fiscal and current account deficits.
On GST, Chidambaram’s meeting with Modi will be followed by another meeting of the finance minister with the committee tasked with steering the transition to the single-tax regime. “I am hopeful that we will be able to resolve all the issues around GST,” Chidambaram said. “Once we agree on the broad points, passage of the GST Bill should be possible at the earliest.”
Separately, senior finance ministry officials have disclosed recently that if the niggling differences were overcome, it would be possible to roll out GST in 2013.
GST is India’s most ambitious tax reform and aims to unify the country into one common market. Its implementation has been delayed because of a lack of consensus between the Centre and the states on some of the key proposals for implementation of this tax regime, including the formation of a dispute resolution panel and the need for a floor rate with a band. The non-payment of central sales tax compensation by the Centre to the states has also become a sticking point in the last one year.
Chidambaram had earlier expressed hope that the constitution amendment Bill for the roll-out of GST will be cleared by Parliament before the end of the current fiscal year.
Speaking about the Centre’s revenue, Chidambaram was optimistic about the government’s ability to meet its disinvestment and tax collection targets.
News agency PTI reported that a committee of officials from the steel ministry and the department of disinvestment would meet later on Monday to decide on a price band for the share sale in India’s second largest state-owned steel maker RINL, and recommend this to a ministerial panel. The government is likely to sell shares equivalent to a 10% stake in the firm in an attempt to raise between Rs.2,500 crore and Rs.3,000 crore. The government hopes to raise Rs.30,000 crore from such share sales this year.
The RINL share sale has been deferred twice already.
Last month, the government announced several measures to tackle the fiscal deficit and attract foreign investment. It effected an increase in the price of diesel, limited the supply of subsidized cooking gas, and relaxed foreign investment rules governing retail, airlines and cable and satellite broadcasting companies. Keeping up the momentum, the cabinet last week cleared a proposal for increasing the foreign direct investment ceiling in insurance and pension to 49%, although unlike the other measures, these will require Parliament’s approval.
In a candid admission that the Indian economy is “challenged”, the finance minister stressed the need for reforms to pursue growth. “Without reforms, we risk a sharp and continuing slowdown of the economy, which we cannot afford given the imperative need to generate jobs and incomes for a large population, most of whom are young,” he said.
India is looking to raise the investment-GDP ratio to 37-38% to push up growth to 8%. The government has estimated that GDP will grow at 7.6% in the current fiscal year. But given that the first quarter GDP numbers came in at only 5.5%, most economists have lowered their growth projections to less than 6%.
“Even if we fall short of 7.6%, our growth rate will be four times than that of advanced economies and twice the growth rate of the global economy,” Chidambaram said.
The finance minister said the government would reach out to opposition parties to seek support for legislation (insurance amendment, Pension Fund Regulatory and Development Authority Bill) that needs Parliament’s nod. He said the insurance sector will require $5-6 billion (Rs.26,100-31,320 crore) capital in the near future and raising the cap on foreign investment will help in this context.
PTI contributed to this story.