Diesel, deficit, determination at Finance Ministry.

After the first draft of the Parthasarathi Shome Committee report on vexatious tax issues, the Kelkar Committee report on fiscal consolidation is expected to be put out on Friday.

While the Shome report should be a shoo-in considering the positive vibes it has generated all across, the Kelkar report could lead to a stiff political test, said sources.

North Block’s view is that high fiscal deficit is nothing new and has happened many times in the past. Though mandarins are seized of the matter, it’s not a crisis yet – that is the refrain.

At the same time, the thinking is that when things are turning bad, there is greater acceptance of some hard decisions and this is where the Kelkar Committee report will be crucial – in turning over a new leaf by biting many a bullet, as it were.

Though North Block admits the high fiscal deficit is crowding out the private sector, it is yet to agree this is the primary cause of inflation. And it’s here that there is widening difference of opinion with the Reserve Bank of India on matters of fiscal deficit, inflation and monetary policy, sources said.

But the new finance ministry under Palaniappan Chidambaram is going full tilt to energise investor sentiment.

In a note to clients following a visit to the corridors of power, Samiran Chakrabarty, economist with Standard Chartered Bank, said three reasons have been identified behind the capex slowdown in India – tax overreach, real cost of capital and regulatory constraints.

These are now being taken care of gradually but there is little chance of immediate recovery.

On credit rating agencies threatening a country downgrade, which could raise the cost of money for companies, the ministry says the fiscal deficit levels in India are not as high as in some other countries and India’s debt-to-GDP ratio is falling substantially.

This is a point that has been repeatedly harped upon by a prominent voice in the stockmarket, Shankar Sharma of brokerage First Global.

The government remains bullish on long-term growth. Some 8% growth for the next ten years is possible with the possibility of tipping even 10% – that is the feeling within.

Finmin in ‘listening mode’
The government is waiting for the right opportunity to introduce reforms – that is the refrain in North Block. That’s because, reforms in India have not been ‘gradualistic’ but always ‘opportunistic’.

The finance ministry is in “listening mode”, with mandarins already doing trips to the Gulf nations and more coming towards south-east Asia, the US and Europe. The new North Block team under Chidambaram is stressing ‘actions’ rather than ‘promises’, with actions ‘grounded in time’, according to sources.

In this regard, Chidambaram’s August 6 speech is used as the guiding principle on policy-making. That day, the FM promised a review of the retrospective elements in the tax policy with focus on pending cases as well as new ones. “Clarity in tax laws, a stable tax regime, a non-adversarial tax administration, a fair mechanism for dispute resolution, and an independent judiciary will provide great assurance to investors. We will take corrective measures wherever necessary. The aim will be to remove the perceived difficulties in doing business in India, including fears about undue regulatory burden or regulatory over-reach,” he said.

Infra projects
There is focus on unblocking infra projects through attention from the Cabinet committee on top 1,000 projects.

Diesel, deficit, determination at finmin
A detailed report on that can come soon. The thinking in government circles is that growth always preceded the build-out of infrastructure in India. Particularly, rural infrastructure has been the focus with not much stress on urban infrastructure. The target is to spend Rs 1 lakh crore on urbran infrastructure under the Jawaharlal Nehru Urban Renewal Mission in the 12th Five-Year Plan. Infrastructure spending target for the 12th Five-Year Plan is likely to be the same in rupee terms but the $1 trillion number would have to be revised downwards because of exchange rate movements. Chidambaram also finds the public-private partnership model limiting, particularly when it does not reach a critical size and blamed that as one of the reasons for slow infra development.

Quick SEB loan recast
State Electricity Board (SEB) loss restructuring process could pick up once the new power minister, Veerappa Moily, settles down. Some states might behave badly even after the SEB loss restructuring is done, but Chidambaram was all in favour of doing it quickly. The Cabinet note for this is ready but Moily is reading it once again. The Congress stance on the power sector was that the root cause of the problem was coal and in coal it was not an issue of “bad policy” but “lack of policy”. The finance ministry has promised to get its act together on coal.

PlanCom rethinks 12th Plan targets
The Planning Commission is rethinking the growth targets of the 12th Five-Year Plan. The Plan report is likely to be prepared by mid-September and should be in the public domain soon. Although an aspirational target of 8% plus could be set, realistically, even a 7% GDP growth should be good enough to fund current account deficit of 2.5% of GDP, according to Samiran Chakraborty, regional head of research, South Asia Global Research, at Standard Chartered Bank. Officials at the Planning Commission were candid in admitting that token rate cuts from the RBI are not going to revive “animal spirits”. The malaise is more deep-rooted on the investment side, they believe, Chakraborty wrote in a note after doing rounds of the corridors of power.

Diesel price hikes coming
Chidambaram favours full correction in diesel prices by linking it with international prices in a few stages. The finance ministry views that the UID programme (digital identity cards for all citizens of India) at some stage could help in direct cash transfer of subsidy for LPG and kerosene but there is no choice but to raise diesel prices.

Other points to note
Govt is strategising a plan to monetise its land holdings. It is also considering more quota for foreign investors in corporate bonds.

Source : dnaindia.com