The Hindu : Business : Welcome investment initiatives

Online edition of India's National Newspaper
Monday, Jul 12, 2004

Business

Business

Welcome investment initiatives

Agencies such as the proposed Inter-Institutional Group are an excellent way of encouraging large commercial banks to enter infrastructure financing, says Abhijit Roy

THE BUDGET proposals are mostly in tune with the policies and programmes set out in the National Common Minimum Programme (NCMP) of the UPA Government, while incremental reforms have not been neglected. A buoyant economy has helped the present Government. As expected allocations to agriculture and social sectors have been increased. With the track record of the team in-charge of budget formulation, one would have been surprised if the budget proposals did not meld together. However, implementation is a different issue.

The role of State governments will be critical. It is well documented that at the ground level most benefits do not reach the intended beneficiaries. The Centre can at best nudge the State governments along the right path, while keeping an eye on implementation. An important aspect is that a number of States are governed by parties that form the Opposition in Parliament.

Improvement of governance will be the key to success. The role of the newly constituted Planning Commission will be important in this regard. The ruling establishment is also making serious efforts to involve civil society representatives including NGOs in the planning and implementation process. Other steps to improve implementation at the grassroots level could include passing of laws on the right to information, appointing ombudsmen to oversee disbursement of funds and actual creation of assets, appointment of reputed audit firms and using satellite imagery to keep track of implementation of large projects.

Investment issues

An Inter-Institutional Group (IIG) of financial institutions consisting of IDBI, IDFC, ICICI Bank, SBI, Bank of Baroda and PNB has been proposed to extend loans amounting to Rs. 40,000 crores to infrastructure projects. The initial focus will be on airports, seaports and tourism. This is an excellent idea as large commercial banks have to be encouraged to enter infrastructure financing in a big way given that for several reasons the developmental financial institutions (DFIs) do not have access to large retail funds.

The Finance Minister, P. Chidambaram, has proposed to establish an Investment Commission to engage foreign and domestic investors to attract investments. In the case of the Foreign Investment Promotion Board (FIPB), he wants the body to concentrate on becoming a one-stop service centre and facilitator, with most FDI clearances placed on the automatic route. There is also the proposal for a National Manufacturing Competition Council to encourage and support the manufacturing sector.

Higher FDI caps

in select sectors

In order to attract more FDI, the Finance Minister has proposed enhancement of sectoral cap on FDI in telecom from 49 to 74 per cent, in civil aviation from 40 to 49 per cent and in insurance from 26 to 49 per cent. In the case of telecom and civil aviation, these are administrative decisions, but in insurance, parliamentary approval is necessary. With the Left parties already expressing their disapproval, it is not certain whether the Government will be able to push through the proposal in the insurance sector.

In telecom, huge amounts are necessary to increase telecom connectivity across the country, while an efficient and reasonably priced civil aviation industry will provide a tremendous boost to industry and tourism.

In insurance, a number of Indian partners of joint ventures are already feeling the pinch of resources as business expands. Typically, during the initial years, insurance ventures are capital guzzlers. There is no particular reason why insurance should be either in the public sector or in the hands of Indian companies. Anyway, substantial insurance business is already being reinsured abroad.

At this point, one should mention the recent circular issued by the Reserve Bank of India regarding shareholding pattern in private banks. Public sector banks control about 75 per cent of the total assets of the banking sector, and there is need for more competition. Putting too many constraints on the growth of private sector banking in the initial stages will be counterproductive.

Larger FII role in

debt market

Mr. Chidambaram has proposed to increase the investment limit for FIIs in debt funds from $1 billion to $1.75 billion, to boost the debt market. On the other hand, inward remittances last year were around $15 billion. In order to discourage arbitrage opportunities, interest rates on non-resident deposits have already been reduced. Now, the Government proposes to remove the tax exemptions on NRI deposits.

In order to increase infrastructure investments in the public sector, the budget has made provisions for equity support amounting to Rs. 14,194 crores and loans amounting to Rs. 2,132 crores to Central public sector enterprises (PSEs) including the Railways.

In the case of PSEs, the Finance Minister has taken credit for only Rs. 4,000 crore worth of divestments during 2004-05, to be realised from divestments in companies like NTPC, Maruti Udyog and Balco. He has also proposed to set up a Board for Reconstruction of Public Sector Enterprises (BRPSE). The Board will advise the Government on measures to be taken to restructure the PSEs, including cases where disinvestment or closure or sale is justified. It will be interesting to observe how the PM-FM duo continue the Left parties in this regard.

In the case of industry, 85 items are proposed to be taken out of the SSI reserved list. No major steps have been initiated to encourage industry directly. The Finance Minister probably expects the spin-off effects of increased rural spending to benefit industry.

Major tax reforms have not been announced in this budget. In the case of direct taxes, Mr. Chidambaram is awaiting the final report of the Kelkar Task Force, while in the case of indirect taxes, introduction of a comprehensive VAT is to be introduced in April 2005. Hence, one can expect substantial changes in the tax system in the next budget. However, during the current financial year, it is proposed to tax only persons with taxable income above Rs. 1 lakh. It is estimated that out of 27 million tax payers in India, 14 million will go out of the tax net. Service tax has been widened to cover more services with the rate increased from 8 to 10 per cent.

Larger Budget

support for Plan

As part of Plan expenditure, Rs. 10,000 crores has been added to the gross budgetary support of Rs. 135,071 crores provided in the interim budget, thus increasing the total Plan expenditure to Rs.145,590 crores for 2004-05. Further, Plan capital expenditure has been increased from Rs. 43,612 crores in 2003-04 to Rs. 53,747 crores.

However, while increasing public expenditure, fiscal prudence has been maintained. The revenue deficit during 2004-05 is estimated at 2.5 per cent of estimated GDP (as against 3.5 per cent during 2003-04) while the fiscal deficit is estimated at 4.4 per cent of estimated GDP. The Finance Minister has proposed to eliminate revenue deficit by 2008-09 instead of the previously mandated 2007-08 as per the Fiscal Responsibility and Budget Management Act (FRBM), 2003.

The Indian economy on the whole is performing well. In the next five years, fiscal deficits should be brought under control. The new Government should also focus on institutional strengthening in areas like judiciary, Panchayati Raj and regulatory bodies. One should also realise that with agriculture contributing a little over 20 per cent of GDP, it cannot sustain 60 per cent of the population productively. There is also the need to deal with migration to urban centres. Hence, in future budgets, substantial funds have to be made available for development of urban centres. Encouraging FDI in real estate will help the process of urbanisation, but that is another story.

(The author is an economic analyst and a writer on financial matters)

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