Chidambaram pledges renewed reforms push

New Delhi: Unmindful of the rising political temperature, finance minister P. Chidambaram pledged on Wednesday to push more economic reforms in the remainder of the United Progressive Alliance’s term in power, sought the principal opposition party’s help in pushing crucial Bills through Parliament and raised hopes of an early roll-out of the goods and services tax (GST).

add_main_imageThe finance minister, while ruling out early elections, said the Congress-led government would be in power for the last 13 months of its tenure. He added that India has the potential to grow at an yearly pace of 8% and the government would take small but significant steps to ensure that the country achieves its potential.

“There is much more to be done. The remaining Bills have to be passed… Some of these are executive actions which we will take in the next two-four months. India’s economy will continue to reform,” he said at the India Summit conference organized by The Economist magazine. NextMAds

“If we are not achieving the 8%, it means we are not doing something right,” the minister said, but cautioned that India cannot afford to have economic expansion without job creation.

India’s economic growth is estimated to have slumped to 5% in the year ended 31 March, the slowest pace in a decade, as high borrowing costs and a funding crunch forced companies to put investment on hold and consumers to cut back on spending. Demand for exports slowed as Europe battled a debt crisis and US economic growth remained erratic.

Pitching for more policy changes, Chidambaram said India’s two main political parties—the Congress and the opposition Bharatiya Janata Party—should forge a consensus for pushing through reforms, including higher foreign direct investment (FDI) in insurance, passage of the land acquisition Bill and GST.

The government is also looking at setting up regulators for coal and roads, he said.

The BJP and other opposition parties have turned up the heat on the government as the country heads towards a clutch of state elections in the run-up to next year’s general election. The BJP has demanded the resignation of Prime Minister Manmohan Singh and the sacking of law minister Ashwani Kumar over alleged interference in the Central Bureau of Investigation probe into irregularities in coal block allocations.

The government renewed its policy change push in September, allowing foreign supermarket chains to invest up to 51% in local ventures and permitting single-brand retailers to own 100%. Foreign airlines were allowed to buy up to 49% of domestic carriers.sixthMAds

Chidambaram said there is a strong likelihood that the government will be able to get the legislation for GST passed during the tenure of the current government. There is a 70% chance of the Bills for GST being passed in the remaining 13 months of the UPA’s tenure, he said.

“I am trying to forge a similar consensus (like that achieved on value added tax) on GST. The empowered committee has authorized us to draft the constitution amendment Bill and the normal Bill for GST. If the drafts are endorsed by the EC (empowered committee), then I think the chances of their getting passed in the Parliament are much higher,” Chidambaram said. “I am confident that we are moving ahead.”

GST, India’s most far-reaching tax reform, aims to remove all barriers to movement of goods and services across states and economically unify the country. The past few months have seen both the states and the central government trying to forge a consensus on the final GST architecture.

Mint had reported on 18 April that the finance minister is keen to push GST through before the UPA government’s term ends and may give some fiscal concessions to states to bring them on board, including a firm commitment on the payment of compensation to states once the levy is rolled out and some changes in its design.

The empowered committee of state finance ministers is scheduled to meet in Mussoorie, Uttarakhand, on 10-11 May to decide on some of the unresolved issues between both sides including the revenue neutral rate or the rate at which there will be no loss of revenue to the states after moving to GST, the taxation of inter-state movement of goods and the threshold past which GST will kick in. A finance ministry official had previously told Mint that the finance minister had directed the officials to prepare the final report by May end so that the amendment could be tabled during the monsoon session of Parliament.

Sushil Modi, the deputy chief minister of Bihar and the chairman of the empowered committee of state finance ministers, at a recent industry interaction, asked the centre to hold out a firm commitment on payment of compensation to states for losses arising from GST and central sales tax. He said this would hasten the implementation of GST. Modi added that almost 80% of the work on GST was over.

The GST network will start operations soon and will not be a bottleneck for implementing the programme, Chidambaram said. The GST network will form the information technology backbone of the taxation system

Naina Lal Kidwai, president of the Federation of Indian Chambers of Commerce and Industry (Ficci), said various studies show that a GST regime will add almost 2% (two percentage points) to India’s gross domestic product growth. “It is a low-hanging fruit. Imagine one policy change can make such a large difference to GDP,” she said.

Thomas Richardson, senior resident representative of the International Monetary Fund, said India’s tax revenue to GDP ratio was too low (tax revenue to GDP ratio is 14.6%) and the government needs to take steps to increase this. Increasing the tax base and bringing in GST could be some of the ways to increase this ratio, he said.

On the widening current account deficit (CAD), Chidambaram said given the growth projections of the world economy, it may be difficult to dramatically increase exports and India may have to look at ways to restrain imports. CAD is expected to moderate to 4.7% of GDP in the current fiscal from an estimated 5.1% in the year ended 31 March, the prime minister’s economic advisory council said on Tuesday.

Dismissing fears about the deficit being mainly financed by short-term, volatile foreign institutional investor inflows, Chidambaram said foreign institutional investments in India have always grown, except for one year after the global financial crisis.

He also said the government will strive to keep the fiscal deficit below 4.8% of GDP in the current financial year.

At the same event, Montek Singh Ahluwalia, deputy chairperson of the Planning Commission, said India needs a mechanism to settle disputes between the government and private firms that will improve the ease of doing business and reduce the burden on courts.

“The only option (for the private sector) seems to be the Supreme Court,” Ahluwalia said. “I don’t know how feasible it is, but the government should have an agency, an arbitrator, etc., for resolving disputes.”

If there is a dispute between two public sector companies, the cabinet secretary can resolve it by making them sit across the table, Ahluwalia said, but it is not possible in case of the private sector. “Around 80% of cases in the courts seem to be of government appeals, including tax cases.”

This reform will significantly increase India’s ease of business ranking, which is 134 among around 180 nations, he said.

Ahluwalia also said that it was possible for India to grow at an annual rate of 8% but it can’t happen on a “business as usual” basis. He added that it was not necessary to focus on new reforms between now and the general election due in 2014, and what’s needed are executive decisions to make existing policies more effective.