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Economy Can Recover Sans Reforms: Deutsche Bank

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India could witness a modest recovery in 2013 even without major policy initiatives, according to Deutsche Bank. While a cyclical recovery in 2013 may not need major policy push, a return to 8 per cent plus growth trajectory would necessitate far greater boost to investment, wide-ranging fiscal reforms, and greater policy efficacy, said a Deutsche Bank report released on 6 December.

After a win in the Lok Sabha on the FDI for multibrand retai, the ruling UPA government got a much needed boost on 6 December when Mayawati, the president of the Bahujan Samaj Party, said she would back the government on the FDI-in-retail vote in the Rajya Sabha, virtually ensuring that an opposition motion against the reform will be defeated.

Read also: UPA Wins FDI Vote

Read also: Red Flag On Reforms

A second win on the retail policy will be a much-needed boost for Prime Minister Manmohan Singh as he tries to drive a second wave of reforms through a fractious parliament. The debate over retail reform has proved a costly distraction for the minority government, eating up two weeks of parliament's month-long winter session.

The government's win on FDI would clear the way for voting on bills aimed at attracting foreign investment to the ailing pension and insurance industries, two measures seen by financial markets as important steps in further liberalising an economy in the midst of a slowdown.

But Reforms Needed For Durable Recovery

Ackowledging that reforms would be helpful for a durable economic recovery, the bank's analysts pointed out that a case  can be made for a near-term economic bottom even without major initiatives. The Indian economy is likely to see a pick-up in external demand next year, and exporters would also be supported by a considerably weaker exchange rate. The authorities' strategy to cut overall spending on one hand but roll out major projects on the other hand could galvanize business sentiments. The RBI is likely to cut rates next year, which should also help. And finally, we see consumption remaining resilient, helping anchor demand.

After a challenging year, during which growth slowed to 5,5 per cent, the exchange rate came under repeated bouts of weakness, inflation remained stubbornly over 7 per cent, policy reforms took place in fits and starts, and coalition politics became more challenging, India can look forward to a somewhat easier 2013, in our view. While the economy remains vulnerable to inflation and exchange rate risks, coupled with external shocks and domestic political turbulence, incentives are in place for the authorities to respond with investment friendly reforms, a dynamic already underway.

Some of the key reforms expected in 2013 and beyond include
  • Implementation of the recommendations of the Shome Committee Report: To restrict scope of GAAR and defer it by three years
  • Retrospective tax to be applied in rare cases
  • The government should abolish tax on gains arising from transfer of listed securities -- be it in the nature of capital gains or business income -- to both residents as well as non-residents. The  STT could however be increased to ensure no loss of revenue
  • Expediting disinvestments to meet the fiscal target - the government's initial plan was to meet about half its disinvestment target for FY12-13 (Rs 30,000 crore or 0.3 per cent of GDP) by the end of 2012. However, till now the government has raised only Rs 900 crore through disinvestments (NBCC and Hindustan Copper)
  • Disinvestments are expected in companies such as Tyre Corporation of India Ltd., SAIL, Bharat Heavy Electricals Ltd., Oil India Ltd, HAL, NMDC, MMTC, NTPC and Nalco
  • Foreign Direct Investment limit in insurance and pension sectors to be hiked to 49 per cent (existing permissible level is 26 per cent for insurance) subject to Parliamentary approval
  • Indirect tax reform - implementation of Goods & Services Act
  • Setting up of a National Investment Board for speedy approval of infrastructure projects with investments above Rs 1,000 crore. Its mandate could be enhanced to include manufacturing sector projects as well
  • Food Security Act - The Act envisages  bringing about two-thirds of the  population under a comprehensive umbrella of subsidised food through  the public distribution system
  • Public-private partnership (PPP) likely to  see a further boost in the coming years