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PM's Panel Pitches For Bold Reforms

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Projecting a higher growth rate of 6.7 per cent for India in 2012-13, Prime Minister's key advisory body issued a stern warning to the government on 17 August on the need to rein in the country's fiscal and current account deficits to avoid the risk of a credit ratings downgrade to junk status.

"The best way to prevent a ratings downgrade is to put in place a sustainable process of fiscal consolidation because that's the most important parameter, indicator on which that risk or threat has manifested," Deputy Governor Subir Gokarn said on 16 August.

They called for bold reforms, urging the government to raise subsidised diesel prices and adopt measures to attract foreign investment including opening of FDI in multi-brand retail and predictable tax policies. The steps would help ease pressure on the twin deficits and so help an economy that has shifted down several gears this year and the weak rupee.

However, economists doubted the ideas would be turned to action anytime soon.

The suggestions are "well meaning and sound," said Rajeev Malik, a senior economist at CLSA in Singapore. "But the political will to implement the solutions has been lacking. Technocrats cannot do anything about that."

In its Economic Outlook for 2012-13, the Prime Minister's Economic Advisory Council (PMEAC) said deficient monsoon would pull down agriculture sector growth rate to 0.5 per cent putting pressure on inflation, which has been projected at 6.5-7 per cent.

"Economy is expected to grow a shade better at 6.7 per cent in 2012-13," PMEAC Chairman C Rangarajan said pinning hopes on improvement in the manufacturing sector in the second half of the current fiscal.

Earlier in the day, he presented the report to Prime Minister Manmohan Singh.

PMEAC's growth projection for the current fiscal is much better than the forecast made by the Reserve Bank of India (RBI) and other entities. While the RBI lowered its GDP forecast to 6.5 per cent from 7.3 per cent estimated earlier, Moody's and Crisil have pegged it at 5.5 per cent.

The economic growth rate, as per the estimates of the Central Statistical Organisation (CSO) plunged to nine-year low of 6.5 per cent in 2011-12. Rangarajan, however, opined that it might turn out to be more than CSO's estimates.

In order to accelerate growth and deal with the impact of the global problems, Rangarajan suggested boosting investment in infrastructure sector, allow foreign airlines to pick up stake in domestic carriers and contain fiscal and current account deficit.

Making a case for bringing about predictability in taxation regime, Rangarajan said efforts were needed to address investor concerns. He was referring to concerns expressed by investors over retrospective amendment to Income Tax Act and the General Anti-Avoidance Rules (GAAR). Rangarajan said, "There is a need to specifically focus and address the apprehensions that have been occasioned by perceptions of arbitrary actions on tax and other fronts."

In view of the concerns expressed by investors, the government had postponed the implementation of GAAR. Prime Minister Manmohan Singh had earlier set up an expert committee to look into the concerns of foreign investors.

Finance Minister P Chidambaram in his statement on August 6 had said, "Clarity in tax laws, a stable tax regime, a non- adversarial tax administration, fair mechanism for dispute resolution and independent judiciary will provide a great assurance to investors. We will take corrective measures wherever necessary."

The retrospective amendment to the Income Tax Act sought to undo the decision of the Supreme Court in the Vodafone tax case.

Besides other things, Rangarajan also recommended a curb on import of gold, improvement in regulatory regime to encourage investment in mutual funds and insurance, allowing FDI in multi-brand retail and a big push to infrastructure spending to accelerate economic growth.

"For channelising transfer of capital and technology, FDI in multi-brand retail up to 49 per cent may be allowed to attract investment in this sector...," Rangarajan said.

Making a case for reforms in the aviation sector, he said the government should consider allowing foreign airlines to pick up 49 per cent FDI in domestic airlines.

The government, he added, should recast Cabinet Committee on Infrastructure as the Cabinet Committee for Sustainable Development of Infrastructure and make efforts to clear high- impact projects costing over Rs 5,000 crore.

Referring to oil sector, Rangarajan suggested "a suitable increase in the price of diesel in one or more steps, and a cap on the level of consumption of subsidised domestic LPG close to what is currently being consumed by poorer households (i.e. 4 cylinders)".

Losing Momentum
India's economic growth has lost momentum due to global headwinds, sluggish policymaking and more lately worries about a drought in parts of the country. Fearful of a popular backlash, the government has failed to cut expenditure or liberalise the economy to attract investment.

"Given that ratings agencies are watching the situation, I think the budgeted fiscal deficit at 5.1 per cent is a non-negotiable issue" said M. Govinda Rao, a member of the advisory panel.

Economists suggest the government is moving towards a deficit in 2012-13 of around 6 percent of GDP and credit default swap markets already price the country at junk, or non-investment grade.

Global agencies Fitch Ratings and Standard & Poor's Ratings Services this year warned that India may become the first of the BRICS group of large emerging markets to lose its investment grade rating if it did not control the fiscal and current account deficits.

The panel urged the government to raise tax revenues, including by collecting unpaid taxes. It said New Delhi should resurrect a push to allow foreign investment in supermarkets after its attempt to open up the sector flopped late last year.

This time, the foreign investment limit should be capped at 49 per cent, not the 51 per cent level that sparked fierce opposition, it said.

The panel's call to bring the fiscal deficit under control echoes similar comments from the central bank.

India's current account, the broadest measure of its trade in goods and services with the rest of the world, ballooned to a record deficit of $21.7 billion or 4.5 percent of GDP in the March quarter.

The panel forecast the deficit would narrow in 2012/13 to 3.6 percent from 4.2 percent in 2011/12 off the back of lower import bills for oil and gold. But panel chief C. Rangarajan said the deficit needed to shrink to 2.5 percent. Above that level the rupee comes under pressure, a panel member said.

The panel raised its inflation forecast for the end of 2012/13 to 6.5-7 percent, up from an earlier forecast of 5-6 percent, to reflect expectations for higher food prices as monsoon rains are well below average.

"The estimates are pretty much in line with Reserve Bank of India's projections, but the growth number seems to be on the optimistic side on the assumption that agriculture growth won't be as slow as (the) market expects," said Rahul Bajoria, regional economist with Barclays in Singapore.

The panel's views are closely watched, however, because they are used by the prime minister's office to determine policy. The finance ministry produces its own estimates.