6 key policy reforms that may save India from downgrade
Warning bells have already been rung loud and clear for the government to stand up and assure that there is "no need to panic". On the back of policy overhang slowing down economic growth and widening current account deficit, India is already facing a risk of possible downgrades.
A deteriorating Indian economy coupled with policy paralysis and political turbulence had the Standard and Poor's issue a threat of a downgrade if situation did not improve in near future. Soon after the warning bells were issued, the government assured investors that there was no need to panic, but the fact remains the rating agency revised India's long-term rating to negative from stable.
Finance minister Pranab Mukherjee’s subsequent statement that the government will try and pass some financial reforms in the current session of Parliament was taken with a pinch of salt as he missed the opportunity, (read FY 12 Budget) to take tough decisions.
The task at hand includes rolling of Goods and Services Tax (GST), Direct Tax Code (DTC), FDI in aviation and retail, Companies Bill and diesel decontrol. This apart, the government has to focus on review of subsidies, insurance amendment bill, pension fund regulatory bill, banking amendment bill and sugar decontrol reforms among others.
Listed below are some of the key policy reforms that are eagerly awaited:
Goods and Services Tax (GST)
It is a value added tax to be implemented concurrently by the central and state governments as the Central GST and the State GST respectively.Under GST, taxation burden is to be divided equitably between manufacturing and services, through a lower tax rate by increasing the tax base and minimizing exemptions.
This will benefit individuals as prices are likely to come down leading to more consumption.
However, the much awaited reform is waiting to see the day of light due to lack of unanimity among state governments over its structure. In 2006, the Centre and state governments had agreed to cut CST by 1% every year from April 1, 2007 and eliminate it by April 1, 2010 to coincide with launch of GST but without any effect.
Failing to meet many deadlines, Bihar Finance Minister Sushil Modi, who heads the panel of state finance ministers assured that the much-awaited indirect tax reforms are likely to be implemented from the beginning of next fiscal.
The chief economic advisor Kaushik Basu has also said implementation of GST would be a difficult task.
Meanwhile, corporate India has been batting for implementation of GST. Infact, Adi Godrej, chairman of the Godrej Group and President of Confederation of Indian Industry (CII) believes that an early implementation of GST may boost GDP by1.5-2% points.
Direct Tax Code (DTC)
The code, which will replace existing Indian Income Tax Act 1961, intends to cut tax rates to bring more people and companies under the tax net, phase out profit-linked exemptions for companies and replace them with investment-linked incentives.
It is expected to remove most of the categories of exempted income like Unit Linked Insurance Plans (ULIPs), Equity Mutual Funds (ELSS), Term deposits, NSC (National Savings certificates), long term infrastructures bonds, house loan principal repayment, stamp duty and registration fees on purchase of house property.
DTC too, like its cousin GST has been stuck in multiple political decisions and agreements.
However, Pranab Mukherjee is confident of rolling out DTC from next year. "Next year, I will introduce the DTC fully after examining the recommendations of the parliamentary standing committee. The recommendations of the parliamentary standing committee were available to me on March 9," said Mukherjee.
FDI in aviation
The government is mulling to allow stakes of upto 49% foreign direct investment (FDI) in aviation industry. Currently, foreign investors are not allowed to invest in the domestic carriers. Most experts feel that this approval may infuse much-needed fuel to the otherwise ailing sector. The industry has been reeling under soaring fuel costs, swelling debts, high taxes and cut-throat competition.
Kingfisher Airlines, SpiceJet and GoAir are most likely to gain from the approval.
The government is likely to allow foreign airlines such as Emirates, Lufthansa, British Airways and Etihad to invest in Indian airlines.
FDI in retail
The government permitted 100% FDI in cash and carry or wholesale trade, albeit with several riders.
FDI in multi-brand retail, however, is not allowed at all. Last November, the cabinet cleared FDI in multi-brand retail. However, the government had to immediately roll back its decision and limit it to single-brand retail after West Bengal CM Mamata Banerjee’s opposition.
FDI in multi-brand retail is expected to see more corporate-backed convenient large format players entering the market.
While petrol prices are market-linked, the government fixes the rates of LPG, kerosene and diesel, which results in a large budgetary expenditure on subsidies. The government is yet to decontrol diesel price though most oil companies are crying foul over it. Yesterday, the government once again said diesel could be deregulated soon. On April 24, government had agreed 'in principle' to deregulate diesel prices.
In June 2010, government decontrolled petrol price and promised a similar action for diesel. It had also assured periodic adjustment in prices of kerosene and liquefied petroleum gas or LPG for domestic use, neither of which happened.
The government’s 'in-principle' decision was taken on the basis of recommendations by a panel under former Planning Commission member Kirit S Parikh in 2010. Parikh had recommended that the government should deregulate the price of diesel with immediate effect. However, despite rising global crude prices, India hasn’t raised diesel prices since July last year.
If prices of diesel are freed up, it could have a significant impact on transportation costs and in turn input costs for small and medium businesses.
Companies Bill 2011
The bill will replace a half-a-century-old act. It proposes several forward-looking steps, including mandatory maintenance of documents in electronic format, introduction of e-governance and provision for encouraging ethical corporate behaviour. The bill is scrutinised by the Standing Committee on Finance after objections by various parties, particularly the BJP, on certain provisions.
It is yet to see daylight due to indecisiveness of the present government. However, recently Union minister for corporate affairs M Veerappa Moily has assured that much-awaited Companies Bill 2011 is likely to be taken up in this parliamentary session.