Monday, January 15, 2007

India Growing at 8% Plus - TIME To Refocus

Indian economy is growing at 8% plus for the last 3 years plus. The industries, service sector, the real estate sector, all are growing at a good pace. It is a time to celebrate, but at the same time we need to tighten our belt to refocus our energy towards those who are yet to be benefited from growth. More than 50% of Indian population is still poor without adequate facilities for health, sanitation and safe drinking water. More than 350 million people are yet to have proper houses. Even the middle class still does not have reasonable facilities, enough resources and proper infrastructure to ensure a reasonable quality of life.

The UPA Government came into power about 3 years ago with the challenge of inclusive growth and Bharat Nirman with a significant commitment to eradicate poverty and to provide education to all. In the last 3 Annual Budget exercises, the Government has promised development of infrastructure including roads, water, power, health and rural telecom. No significant progress in these areas has so far been made. The Finance Minister is on record to say that the Government does not have adequate resources to spend for development of infrastructure. The Government wishes to depend largely on the private sector to achieve its target. The following important points are required to be considered :

  • Almost 100% of about Rs. 5.5 lac crore tax collections by the Government every year, go into spending on payment of interest and repayment of Government borrowings.
  • The non-plan Government expenditure as well as revenue plan expenditure is continuously increasing, which is mainly sourced from fresh Government borrowings, creating a debt trap. 
  • Only about Rs. 28 thousand crores are being spent on capital expenditure by the Government. This is also subject to pilferage and leakages.
  • The tax burden on the common man as well as on the corporate sector has already increased very significantly. A substantial reduction in the tax burden is very necessary. The ancient and famous Indian economist Hon’ble Chanakya, in his Kautilya’s Arthshastra (Economic Science) professed that the king has no right to collect more than 1/6th of the income of the people as tax. The public is justified not to pay tax to the Government, in case the tax burden goes beyond 1/6th of income.
  • The Tax GDP ratio is already too high and has to be brought down to the level of not more than 8% of GDP, out of which at least 5% of GDP has to be spent by the Government on capital expenditure for creation of infrastructure including roads, railway network, ports, power, water and education. The Government has to spend additional 3% of the GDP on creation of infrastructure under PPP format, whereby the Government could be a substantial partner, providing equity support as well as debt support to the infrastructure projects. The Government resources could be drawn even from fiscal deficit. No significant inflation would arise, in view of increase in the level of economic activity, as a result of infrastructure creation.
  • The Government needs to consider a comprehensive debt re-structuring plan, whereby the Government takes a pledge, to not to make any further public borrowing. The Government also needs to retire a current debt under one time settlement scheme by repaying the current debt, with very nominal compensation /incentive for pre-payment.
  • The Government could obtain necessary resources for debt re-structuring by disposing of surplus assets and by partly resorting to deficit financing. This money can be ploughed back from the money supply through RBI market operations and CRR / SLR.
  • Special Economic Zones are being approved, one after another. The land acquisition and greed of land mafia, in the name of SEZ development has created a threat of food security for India. Availability of agricultural land for basic agriculture process has been sharply reduced by about 20% in last 5 years. No significant effort has been made to develop barren land.
  • The Government promised eradication of CST, at the time of introduction of VAT. The same is being delayed significantly, on one pretext or the other. In case the State Governments are going to loose revenue, as compared to Pre VAT time, the Central Government has to compensate them, as promised.
  • The implementation of a uniform Goods and Service Tax with an upper cap of 12% to 16% has to be planned with a fair distribution formula between the Central and the State Governments. There should be a clear time table.
  • The rate of service tax is already too high at 12%. This has to be reduced significantly to the level below 8% on most of the services. The Government cannot keep on increasing the service tax rate, without providing ‘Vat ability’ with all Central and State level indirect taxes. The basic exemption limit for service tax has to be increased to at least Rs. 10 lacs to provide a relief to small service providers. 
The UPA Government has to fulfill the dream of inclusive growth. There has to be substantial positive action. The people of India have reposed their faith in the able leadership of Dr. Man Mohan Singh and Mrs. Sonia Gandhi with great hopes. The Government needs to deliver a very comprehensive Macro Economic Action Plan, requiring vociferous implementation. 


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