Monday, Sep 22, 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 the cost of oil imports will fall. This could help restrain both the fiscal deficit and the CAD. While the government may not increase the price of diesel at one go, it should decontrol the price immediately, with a fixed per-litre subsidy that could gradually be phased out. Any fluctuation in international prices will be passed on to consumers. To cut the subsidy on LPG, the limit of six subsidised cylinders per family, which was raised at the instance of Rahul Gandhi to 12 cylinders, should be restored. Carefully used, it should be adequate for most families. Eventually, the price of LPG should be increased to reflect its cost. In fact, the government should plan to give all subsidies in the form of direct cash transfers within two years.

Third, the government should denationalise coal. Coal imports of nearly 150 million tonnes stress the CAD. It pushes up the global market price of coal and our costs go up, resulting in higher costs for generating power. Since many state electricity regulatory commissions are reluctant to raise the price of electricity, and since distribution companies have no obligation to meet all demand, they reduce generation and impose power cuts. So it is very important to raise the domestic output of coal. But the most important measure is to denationalise coal, end the monopoly of Coal India Limited and open the sector to private investors, including foreign ones. We need new technology in coal mining and we must promote underground mining.

Forest clearances needed for coal mining can be speeded up by advance action. A 15-year plan for coal mining could be made and clearances sought for all mines upfront. The cleared blocks may be auctioned off to investors, with stringent penalties for delays in working the blocks. The government should also permit the creation of forest banks, which can be prepared in advance and traded against forests that will be destroyed by mining. It is worth recognising that not all forests are equal. There are only a few dense, virgin forests with a huge diversity of plants. One may define these as “no-go” forests, so that no one wastes time proposing to mine coal or other minerals under them.

Until domestic supply increases, coal imports will continue. To reduce the cost of imports and of domestic transport, all coal-based plants should be given tradable coal linkages on a pro-rata basis. Coastal plants far away from mines can sell their linkages to other plants and import coal.

Fourth, power shortages should be history. While deficits, both of peak power and of energy, have been lower in 2013-14 than in the previous year, this is partly due to the fall in industrial growth. To avoid shortages, discoms should be obligated to supply power to all consumers and fined for not doing so. This will make them buy power from states with surplus. Also, the restructured accelerated power development reforms programme to reduce aggregate technical and commercial (AT&C) losses — a euphemism for power theft, inefficiencies in billing and collection as well as transmission and distribution losses — has made progress, but not as desired. The Central government should impose a cut-off date for this programme to incentivise states to speed up their efforts. It is important to reduce AT&C losses if the price of electricity is to be contained. A number of states, including Gujarat, have reduced such losses, even for state-held discoms. Surely this can be repeated?

Fifth, the environmental clearance process should be streamlined. While environmental clearances cannot be completely dispensed with, the processes need to be made quick and transparent. During the permit raj, manufacturers needed a licence from the Directorate General of Technical Development, which prescribed what to produce, how much to produce, how to produce and where to produce. This was dismantled in 1991 and the economy boomed. Unfortunately, over the years it seems that the DGTD has been replaced by the Directorate General of Environmental Clearance.

Sixth, the land acquisition act of 2013 should be modified. This act is a recipe for interminable delay in starting any project. It provides for a social impact assessment (SIA) for every piece of land acquired, however small. Land acquisition can only begin after the SIA is reviewed by an expert committee. This may be held up further if it is challenged in court. The act should be amended to restrict the SIA to acquisitions above a certain limit and the process should be streamlined. Also, certain provisions for compulsory resettlement and rehabilitation need to be modified.

Finally, the government must assure policy stability. An early declaration that it will have stable policies and not modify any act retroactively is necessary to restore the confidence of investors. These actions could stimulate economic and industrial growth.

The writer is former member, Planning Commission, and chairman, Integrated Research and Action for Development
express@expressindia.com

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