Thursday, September 27, 2012

Reform blitz- will it help?

The government's newly found determination to push ahead with reforms has drawn ecstatic reviews from the media and businessmen. 'From fasting to feasting' is how one businessman is said to have reacted. Is the euphoria merited?

Well, neither S&P nor Moody's, two agencies the government must have had in mind when it chose to go on a reform offensive, are impressed. S&P has downgraded its growth forecast from 6.5% to 5.5%. Moody's says its rating will remain unchanged for now. So do the reforms make sense?

From a long term point of view, many of them do. You can't quarrel with a gradual alignment of petroleum prices with international prices. FDI in aviation should be ok. I am not very sure about FDI in retail, not having researched this matter well enough. But, I guess one can make out a case for a modern retail sector to exist with the traditional one.

Trouble is, these measures will not make a difference to short-term growth prospects. Whether you cut fuel subsidies are not, you are going to end up with a fiscal deficit for 2012-13 close to last year's figure of 5.9%. It is not just that subsidies are high or growing; tax revenues will not grow fast enough at the current GDP growth rate.

From the short-term point of view, we need to expedite ongoing projects. That should suffice to match last year's 6.5%. As for the medium term objective of growth of 8%, I am sceptical about achieving fiscal consolidation as a means to raising the growth rate. This did not happen earlier; it's difficult to see it happening now.

We had fiscal consolidation in 2004-08 because of a growth boom that was linked to the global boom. The challenge, therefore, is how do we raise the growth rate in the absence of a similar global boom. There has to be an indigenous growth impulse. This can only be enhanced public investment. I would say: disinvest in a big way and use much of it for public investment. That will boost growth, cause the fiscal deficit to fall and lead to a decline in interest rates.

More in my ET column, Reform push may not deliver. 


Anonymous said...

I was a bit surprised about the possible actions you have suggested that should be taken particularly disinvestment. I recall your previous columns criticising Arun Shourie who was pushing for disinvestment and privatisation of just about every Public Sector Undertaking including the Navratnas and now you have endorsed the very same set of proposals.
At a time when there is more global uncertainty in prices it is necessary in larger public interest to have a more public control over the PSUs.

- Deeps

T T Ram Mohan said...


I have been against privatisation, the transfer of control to private hands, but have always favoured disinvestment as a means of bringing more efficiency into PSUs bu subjecting them to market discipline. There are a number of PSUs where the government's stake is in the eighties and nineties (and some where it is 100%). Small equity stakes could produce the funds needed for public investment. In other words, we are talking about restructuring of the government portfolio- disinvest in commercial enterprises and invest in infrastructure. I urge this now as a means of quickly producing growth. Of course, one may time the equity sales in order to realise the best prices.


Anonymous said...

I have one query about divestment. Lets suppose govt start divesting in best possible manner. What will be the round about figure of potential earnings? Will that be sufficient in meeting huge infra investment requirements of India?

- Kapil

Anonymous said...

Dear Prof.,

Disinvestment in small measures might help in Govt. mobilise some revenue but that would be a short term measure.

Nobody understands why areas like financial/commodity derivatives etc. aren't brought under taxation. Also Long Term Capital Gains can also be brought back for all assets. Given the turnover in Indian Bourses this should help in good measure to bridge the deficits and control to some extent the speculative behaviour in these.

- Deeps

Anonymous said...

Dear Sir, Please review & critique; Is the assumption correct that reforms in Retail sector would significantly increase Tax Revenue and probably improve quality of service and pricing transparency

1) The Indian Retailer to a great extent has always attempted to remain out of tax Bracket (using loopholes or clearly illegally)
2) Even more of Indian population would start getting into taxable sector (for the social factors lead most of the offspring(s) of a retailer to continue holding on to their shop(s)

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