The Hindu Business Line : Government rides the wave

Most of the measures announced by the Government cannot be deemed reckless or populist. It has decided to use the bountiful foreign exchange reserves to facilitate imports of capital goods that the country needs. Buyers benefit and when they do, the economy does too. Regardless of whether there is a poll angle or not, the Government is to be lauded for taking the steps, says V. Anantha Nageswaran.

The Finance Minister, Mr Jaswant Singh's recent moves are well-timed politically astute.

WHEW! It is somewhat difficult to keep pace with the hectic activity of the Government of India. In the last few days, the Government has been on an overdrive. It is utilising the slog overs well. It has lowered duties, removed ceilings on overseas investment by Indian corporations, relaxed external commercial borrowings norms and has simplified procedures for services and direct tax assessment.

Most of the measures cannot be deemed reckless or populist. There are no blatant give-aways as in giving dhotis and chappals to all people or feeding the poor in temples at government expense. The Government has decided to use the bountiful foreign exchange reserves to facilitate imports of capital goods that the country needs. That the reduction of Customs duties would boost competition to domestic manufacturers is the icing on the cake. Buyers benefit and when they do, the economy does too.

Regardless of whether there is a poll angle or not, the Government is to be lauded for taking the steps. In his columns for the Express group of newspapers, the former Finance Minister, Mr P. Chidambaram, had exhorted the Government to allow freer imports, taking advantage of the burgeoning foreign exchange reserves that have crossed $100 billion. Mr Jaswant Singh has done precisely that.

As India is busy finalising free trade agreements with countries near and far, it makes perfect sense to lower Customs duties and remove the special additional duty. It conveys the right message and sets the perfect tone for these agreements. Further, when the country is unfairly facing opposition from Western nations and politicians for the migration of Information Technology jobs to India, lowering the Customs duty takes the sting out of their criticisms. Hence, it is a well-timed politically astute move too.

Further, the Prime Minister's announcement that Indian companies can acquire foreign assets (including agricultural assets) to the full extent of their net worth is a virtual opening up of the capital account by a confident nation, sure of its place in the global economics league table. It is bound to reinforce the recent trend of Indian companies buying strategic foreign assets. Prophets of doom could point to the risk of a rising price of crude oil depleting the foreign exchange reserves quickly. After all, West Texas Intermediate crude oil closed well above $34 per barrel on Friday. Perhaps, anticipating that the oil price, on average, would be higher than in the past, the Government has moved to create a strategic oil reserve and has allowed the rupee to appreciate nearly 10 per cent from its low in 2002. Further, if Indian corporations acquire foreign assets prudently, they should result in a steady stream of overseas earnings in the years ahead.

Some commentators have criticised the Finance Minister for tempting fate with his measures. They have invoked the logic of the failed Laffer curve in the US and predicted a fiscal crisis for the country. Their wailings betray the typical Indian timidity and an incorrect understanding of economics. The US Government in the 1980s , justified tax give-aways to special interest groups on the premise that the benefits would trickle down to other segments of the population, boosting growth and tax revenues down the road. It did not happen. Hence, the politically-motivated Laffer curve theory was doomed.

In contrast, the measures that India has announced are aimed at boosting the structural competitiveness and raising the potential growth rate of the Indian economy. Bulk of the measures is concentrated on indirect taxes whose incidence falls on the entire country. Hence, the charge that the Government is triggering a potential fiscal crisis is uncalled for.

We will start the review of the announced measures with a seemingly minor change. That laptops are now free to be imported removes a big irritant for professionals bringing their own laptops into the country for use. Customs officials invariably hold up visitors entering the country with laptops and want that to be entered into the passport. These are minor irritants but they often sway major decisions. The lowering of excise duty on Aviation Turbine Fuel and abolition of Inland and Foreign Travel taxes are surely welcome steps.

Tourism, as has been observed by many, has the biggest potential to create jobs for it is not education-intensive. Hence, it is an ideal growth area for India with its tremendous tourism potential. Indeed, the Home Ministry would do well to take the cue from the Ministry of Finance and begin to work on ushering in a mindset change in the immigration officials serving in our airports. On a recent visit to Chennai, one had to wait in the outbound immigration check for ninety minutes. This was needless.

The lack of adequate and friendly staff compounded the problem. The immigration officials at airports can make a big difference to the visitors' first and last impressions and they seem to be determined to be indifferent to the possibility.

The measures announced to boost funding for infrastructure projects and for small and medium enterprises are welcome and it will be up to the notified nodal agencies and financial institutions to give concrete shape and thrust to them. These together with the reduction of Customs duties on project imports and on power distribution and transmission projects continue the present Government's thrust on infrastructure.

The move to allow the Food Corporation of India to borrow directly from the market to finance its procurement operations has not received adequate attention in the media. It is significant. It induces external discipline on storage and disposal of the foodgrain stocks. The logical next step would be to further de-emphasise the role of the Food Corporation of India in grains procurement. All restrictions on inter-state movement of food-grains must be abolished and the government should really be a buyer of last resort.

There is also a need to wean farmers away from the water-guzzling wheat and paddy cultivation. Opening up procurement and removal of restrictions on grains movement and crop diversification have to be seen as part of the overall food security policies.

While most of the concessional loan schemes — 200 basis points below the Prime Lending Rate — for farmers, students, small and medium enterprises and infrastructure projects lower the cost of capital for borrowers, the cost is borne by the Government eventually. This is not the same as lowering the effective cost of capital in the economy. It can come only through judicious management of deficits. This author has consistently emphasised on the need to improve the quality of India's fiscal deficits rather than the quantum. A fiscal deficit that is high in quality would be geared towards boosting the country's economic potential. As the country realises its growth potential, the fiscal deficit would automatically come down. Interest costs would naturally be lower then, as the country's credit rating would rise.

Successive finance ministers have managed to find only soft solutions to the problem. The sense of urgency is elusive and any future Central Government would do well to take inspiration from the recent example set by the Tamil Nadu Government when it took on State government employees demanding unreasonable increase in wage and other compensation. Public sympathy was with the Government and not with the striking workers. If the Government shows courage, pampered workers would blink first and fiscal policy would then be truly liberated.

Yours truly had urged the Finance Minister to reduce the duty on aviation turbine fuel, make cost of capital affordable and boost infrastructure (Business Line, December 26). The arguments were motivated by the framework of five `I's for India: Interest rates, infrastructure, investment, information and image. It is gratifying (though Yours Truly is under no illusion that his suggestions were the trigger) that the government's measures are consistent with the suggestions made. It would have been even more satisfying had the Government announced measures to make its functioning more transparent and accountable to the public. Full and relevant information flow to the public from the Government is rare. The national leaders should train their sights on this governance imperative next.

A country that can grow at 6-7 per cent, despite the government and the larger public sector mostly being a drag in every sense of the word, can easily achieve 10 per cent with the government on its side. This government is trying but it can and, I hope, will try harder.

(The author is Director, Global Economics and Asset Allocation, Credit Suisse. The views are personal. Please address feedback directly to nageswar@singnet.com.sg)