Prospects and policy issues

Prospects for the current year appear brighter than the initial, rather subdued, estimates that followed in the immediate aftermath of a seriously deficient monsoon. Low inflation, strong export growth, and satisfactory industrial performance in recent months continue to be sources of strength. The growth of GDP in 2002-03 does, however, have a risk of under-performance vis-à-vis the growth assumptions of the current Budget. It is important to underline that the comfortable food stock and foreign exchange reserve position provide significant cushions on the price and balance of payment fronts. Any intensification, however, of conflict in the Gulf and/or the middle-east, with ramifications on the international price of crude; delays in recovery of world trade and output, and resolution of the Latin American debt problem impart uncertainty about the growth prospects of the Indian economy in the current year. In terms of policies, it is essential to address the following critical areas i) Accelerating structural reforms ii) Rapid improvement in infrastructure iii) Making continuous progress in fiscal consolidation, and iv) Accelerating investment for sustained growth and enhanced employment.

Accelerating structural reforms

Reforms in agriculture The year has seen some significant movement towards reforms in agriculture.

1. The number of commodities under the Essential Commodities Act has been pruned to eighteen
2. Restrictions on movement and stocking of six agricultural products have been removed to establish a common market in the country; and futures trading has been permitted in 42 commodities, including sugar and tea.

Further reforms required

• Amend the Agricultural Produce Marketing Committee (APMC) Act
• Remove regulatory inefficiencies
• Value addition
• Infrastructure
• Raising irrigation potential
• Efficient management of the country’s food economy

1. Amend the Agricultural Produce Marketing Committee (APMC) Act There is need to amend the Agricultural Produce Marketing Committee (APMC) Act to promote agricultural diversification by allowing agricultural producers to access new markets directly. Agriculture being a State subject, the States need to urgently initiate necessary amendments to the APMC Act. These reforms will boost private investment in agriculture and lay the foundation for quality growth.
2. Remove regulatory inefficiencies The export potential of India’s agriculture is large, though untapped, which is why it is critical to remove regulatory inefficiencies like prohibitive food standards laid down by the Prevention of Food Adulteration Act, the Food Products Order, the Meat Products Order, the Bureau of Indian Standards, and the Milk and Milk Product Order (MMPO).
3. Value addition While the spectacular growth in production of cereals has been instrumental in ensuring the country’s food security, there is also some evidence of growing diversification in agriculture. Value addition in horticulture, floriculture, and sericulture enterprises, as well as in food processing has started yielding rich dividends to farmers in some regions. The country produces over 140 million tonnes of vegetables and fruits per year; these include both tropical and temperate varieties, of which barely 1 per cent goes through the processing route for value addition. There are some success stories in terms of specialised production for exports - for example, grapes from Maharashtra and Andhra Pradesh, cut flowers from Karnataka, and fruits and vegetables from Punjab. Marketing of standardized and processed agricultural products of assured quality under brand names in the domestic market has also started. The potential of Indian agriculture lies in the twin advantage of an abundant and skilled labour force in agriculture and availability of a variety of climatic zones — temperate, tropical and sub-tropical. India can produce a variety of labour intensive, value added agricultural products, which have a ready global market. Plantation crops, like tea, coffee, rubber, pepper, and medicinal herbs and plants, which have traditionally constituted an important sub-sector of high-value agriculture, need to be boosted.
4. Infrastructure Cold chain storages, refrigerated transportation and mechanical port handling facilities are important infrastructural inputs for minimizing wastage and promoting faster and better delivery of high-value agricultural products to markets, both at home and abroad. The key to value addition in agriculture, and consequent income and employment growth in rural areas lies in building up the required infrastructure. Public-private partnership can play a vital role in promoting this infrastructure.
5. Raising irrigation potential The earlier emphasis on raising irrigation potential has to be renewed with greater vigour, especially through watershed development. Access to water — potable drinking water and ordinary water for irrigation — is an absolute necessity and should constitute an integral part of the strategy for rural infrastructure development.
6. Efficient management of the country’s food economy The efficient management of the country’s food economy has become a major policy issue in recent years, with India emerging as a surplus producer of a number of exportable agricultural products, including foodgrains. Minimum Support Prices (MSPs) for rice and wheat have, however, distorted the comparative and regional advantage of some crops, thus generating both surpluses (sugar, rice, wheat) and shortages (oilseeds, pulses and fibres). This needs to be addressed urgently. An accumulation of large food stocks has posed serious issues with regard to the current food management policy. Replacement of universal PDS by a targeted public distribution system has created some anomalies. The merits of MSP in achieving the objective of food security is established. It is important, however, to recognize that the manner of fixing the procurement price as well as our procurement methods have begun to seriously distort markets and also eliminate the role of private trade in foodgrains, thus aggravating the subsidy commitments of the Central Government. There is then the problem of “round tripping”, whereby the same foodgrains are bought cheap from the system and sold back to the system at higher prices, thus permitting unintended arbitrage. There is need to remove intermediaries by moving to a more decentralized system of procurement.

Reforms in small scale industries

The small-scale industrial (SSI) sector is an important source of employment and significant export receipts. However, the major anomaly, whereby importers can access the Indian market for products reserved for small sector, but larger Indian producers cannot, needs to be rectified. Measures need to be put in place to encourage the SSI sector to graduate to large scale and realise its comparative advantage, particularly in production of components and ancillaries. In the area of structural reforms, a closely related issue is the question of labour market reforms. Accessing the global market with consumer goods of quality, at competitive prices, produced in both large and small scale establishments operating under flexible labour-markets should be the goal.

Improving infrastructure

Inadequate availability of quality infrastructure at internationally competitive prices has long been recognised as a handicap for the development of the Indian economy. Bottlenecks in transportation, including port handling, and unreliable and expensive power supply are two impediments that need redressal. The impressive gains achieved in roads and the highway sector in the current year are indeed noteworthy. It is essential that NHDP is completed on time. This will revitalize the physical infrastructure of the country.

Similar initiatives are required in the sectors of civil aviation, railways and ports. Corporatisation of ports and new mechanisms of public private partnerships, which are yielding results at ports such as JNPT, requires speedier execution, as does enhancement of private sector participation in port operations.

Railways Restructuring of rail services is critical given the competition that the railways will experience from the road sector upon completion of the Golden Quadrilateral, and the North-South and East-West corridors. Railway finances, rationalization of user charges, railway safety and growth with modernisation remain core issues for the railways, along with the rapid development of commercially viable projects under a special purpose vehicle and through public-private partnerships.

Power sector Power sector reforms, though progressing satisfactorily, need to be accelerated by enacting the Electricity Bill. This will enable greater private initiative in electricity transmission and distribution. Development of the National Power Grid for integrating the transmissions network in order to enable operational optimization of the available generating capacities is an essential requirement, as is quick progress in fulfilling the targets under the village electrification programme. Rural electrification need not, however, rely solely on government initiatives. Effective implementation of the Accelerated Power Development Programme (APDP) is essential to stimulate State level distribution reforms.

Telecom In the telecom sector, a major success story is seen in the sharp increase in tele-density. More reforms in this sector, aiming to provide benefits of rapid convergence between telecom and information technology (IT) to users in more efficient and cheaper ways, will flow from the enactment of the Communication Convergence Bill, 2001.

Rapid improvement of infrastructure requires limiting the cost and time overruns of public infrastructure projects. The recommendations contained in the first report of the Committee to examine the extant procedures for investment approvals and implementation of projects and to suggest measures to simplify and expedite the process for both public and private investments, including more rigorous project preparation, clear separation of the rules of project identification, preparation, appraisal, and approval, and incorporating lessons learnt in all stages of project cycle, need to be implemented. The Government’s commitment to constantly invest in, and thus improve, both social and physical infrastructure, must continue. Investment in health, education, drinking water, and living environment, and improving the quality of life of our citizens must be accelerated.

Fiscal consolidation

There is a need for purposeful movement towards fiscal consolidation with a modern and efficient fiscal order that is of global standards. The fiscal deficit, as a proportion of GDP, has gone up from 4.1 per cent in 1996-97 to 5.9 per cent in 2001-02 for the Central Government, and from 9.6 per cent in 1999-2000 to 9.9 per cent in 2001-02 for the general government (i.e. consolidated Centre and States). While the rate of interest continues to be below the rate of growth of the economy, high primary deficits (fiscal deficit less interest payments) have led to progressive increases in both the deficit-to-GDP and debt-to-GDP ratios. Increases in debt, with the associated high interest payments, have resulted in pre-emption of a very large proportion of revenue receipts, both of the Centre as well as of the States by interest payments.

Fiscal consolidation requires a two-pronged strategy of augmenting revenues and restraining expenditure. Enhancement of revenues will require restructuring of the tax system with a move to a stable, impersonal and efficient tax administration with a minimum interface between the assessee and the tax official, a system with minimum of exemptions in the field of Central excise and State sales tax, and a move to a VAT.

In non-tax revenue, there is a clear need for better-cost recovery through appropriate user charges.

Expenditure

• It is critical to contain the growth of wages and salaries and pensions.
• Following the Expenditure Reforms Commission’s recommendations, various Ministries/Departments of the Central Government have identified around 23,416 posts for abolition. Out of this, 7,921 posts have been abolished. It is imperative to abolish all the posts that have been identified for this purpose.
• Pension and other retirement benefits need to be rationalized.
• There is need to revise the rate of interest on small savings in line with movements in market-related interest rates.
• Any successful expenditure rationalization and reprioritization programme must address the issue of subsidies, through a rationalization of the prices of food, fertilizers, LPG and kerosene.
• Disinvestment is an integral part of the reform process. Disinvestment has proceeded by building up a political consensus across a wide spectrum of opinion. While disinvestment receipts, estimated at Rs. 3,022 crore in the first half of the current year against the budgeted target of Rs. 12,000 crore for the entire year, indicate a slower than estimated pick up in the momentum of such receipts, the underpinning of the process in a wide consensus has the advantage of guaranteeing no rollback of such reforms. Disinvestment should not be viewed purely from the revenue perspective. It is being undertaken essentially to unlock the productive potential inherent in the public sector undertakings. One of the yardsticks for measuring the huge productive potential of the public sector enterprises is the disinvestment receipts from such enterprises, relative to the losses they presently incur, or the net present value of the low profits that they make. But quite apart from unlocking their productive potentials, disinvestments does also galvanize these enterprises to promoting high quality employment as well as competition in the market place.
• Gross budgetary support (GBS) for the Plan continues to be the major expenditure item. Any programme of fiscal consolidation needs to look into the questions of how plan expenditure affects the path of fiscal deficit and debt. A plan expenditure that does not increase the revenue of the government in subsequent years, including by sufficient user charges, creates problems for servicing the debt incurred in financing the plan expenditure itself. As much as 70 per cent of the Central plan assistance to non-special category States is in the form of loans. Furthermore, plan expenditure often contains large proportion of plan revenue expenditure. A large plan size, which does not address these aspects, when combined with indifferent implementation, does lead to a deterioration of fiscal balances both at the State as well as at the Central level. Major possibilities exist of augmenting plan resources through public-private partnerships in both physical and social infrastructure. Such partnerships should be vigourously pursued and should progressively be the default option.

Accelerating investment

Gross domestic investment at current prices as a proportion of GDP has declined marginally from 24.3 per cent in 1999-2000 to 24 per cent in 2000-01. This is mainly on account of a fall in private investment. Investment rate in India is comparatively lower than the desirable and the achievable. Sustained growth of output and employment requires a step up in domestic investment. Recovery in investment needs to be promoted through quality infrastructure, in areas such as roads, airports, seaports, and acceleration of structural reforms. Furthermore, the draft on national savings by the Government has to be brought down to reduce the rate of interest and promote private investment.

The availability, as well as cost of finance to the private sector, does critically depend on how soon the issues of NPAs in banks and financial institutions, enhancement of creditors rights, and reduction of the risk premium on loans can be resolved.

Manufacturing has recovered significantly in the first half of the current year, registering an overall growth of 5.3 per cent compared with 2.5 per cent in the same period of the previous year. Month-wise growth indices point to a progressive acceleration in manufacturing growth. The upbeat trends in manufacturing must be sustained. The manufacturing sector should be encouraged continuously towards the path of significantly higher production volumes, enhanced quality and higher value. Similarly, sectors with high employment potential like housing and tourism need constant promotion and growth.

Some recent hydrocarbon finds of significance need to be rapidly converted to usable assets, and the necessary process should be facilitated at the earliest. Pharmaceuticals and biotechnology are other growth sectors needing due attention. In the already successful field of informatics, India is now poised to rapidly move into high value, next generation technological advancements. This requires support, as does continuous future investment in education, research and development.

Acceleration of FDI is a high priority. The Steering Committee on FDI has made important recommendations on the question of promoting FDI, as well as changes in sectoral caps and approval mechanisms. Implementation of proposals in this regard, which are being considered by a Group of Ministers, will be important in this context. Financial intermediation, by channelling savings into most productive investment opportunities is critical for accelerating investment. Reduction in NPAs leads to better financial intermediation and tighter intermediation spreads; and needs to be speeded up through rigorous implementation of the “Securitization, Reconstruction of Financial Assets and Enforcement of Security Interest Ordinance 2002” and formation of asset reconstruction companies (ARCs). Revival of equity markets by improving corporate governance is also critical for boosting investment; and this requires effective regulation by SEBI, already strengthened by the recent Ordinance. Streamlining regulations at the Central, State and local levels is critical for accelerating investment. The recommendations contained in the second report of the Committee to examine the extant procedures for investment approvals and implementation of projects and to suggest measures to simplify and expedite the process for both public and private investments, regarding re-engineering the entire gamut of regulatory processes at all levels on the basis of clear principles of transparency, absence of discretion, minimization of documentation, unambiguous decision rules and accountability, are important in this context. The re-engineering of the processes, culminating in their embodiment in e-governance systems, must be completed rapidly.

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