Saturday, Dec 20, 2014

100 day challenge

If the diesel subsidy can be removed, the government will save expenditure on under-recoveries. Higher prices will encourage efficient usage and the cost of oil imports will fall. This could help restrain both the fiscal deficit and the CAD.  (Source: PTI) If the diesel subsidy can be removed, the government will save expenditure on under-recoveries. Higher prices will encourage efficient usage and the cost of oil imports will fall. This could help restrain both the fiscal deficit and the CAD. (Source: PTI)
Written by Kirit Parikh | Posted: June 16, 2014 12:25 am | Updated: June 16, 2014 8:21 am

What the new government should do to spur economic and industrial growth.

The massive mandate for the Modi government is based on high expectations. Young voters, who opted for the new government in large numbers, want jobs. The much-needed revival of a high growth rate, particularly of industries, requires price stability, a reliable supply of electricity, the removal of environmental bottlenecks, availability of land for industries and infrastructure, tax reforms, a stable policy environment unthreatened by retroactive measures and a competitive, transparent mechanism that eliminates corruption and kickbacks.

What the government does in its first 100 days is important. A mood of optimism needs to be restored by showing an active government is in charge. Unless this is done, the enthusiasm and expectations created among people could turn against the government. Also, in the first 100 days, the government will find it easier to take tough decisions.

The challenge is to accelerate growth without causing inflation, made harder by the inherited macro-economic situation. Former finance minister P. Chidambaram met his fiscal deficit target with a bit of accounting jugglery and at the cost of the financial health of many institutions, holding up payments till after March 31. These payments will be made this financial year. At the same time, the expenditure entailed by the Food Security Act will increase as its coverage expands. So there is a need to cut down on government expenditure and increase revenue to contain the fiscal deficit and lower inflation.

Similarly, the current account deficit has to be contained. In 2013-14, the CAD was brought down by a reduction in gold imports, the lower price of crude oil imports and a significant fall in imports of capital goods as industrial investments slowed down. If the economy is to pick up, industrial investment and output must increase, with the consequent increase in capital imports. Thus, the CAD will be stressed. The government must act, given these macro-economic constraints. What should be done?

First, the GST, the quickest way to raise revenue, should be implemented. It is an efficient tax that curbs evasion. Now that the government has such a broad national mandate, it should be able to persuade state governments to go along with it.

Second, diesel and LPG subsidies should be reduced. If the diesel subsidy can be removed, the government will save expenditure on under-recoveries — the difference between the cost of supply and sales proceeds. Higher prices will encourage people to use diesel more efficiently and continued…

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