Funding, therefore, would have to be internal by freeing the public money locked in PSUs, butthe stand on disinvestment is not yet clear and coalition politics could hinder this process.

The Sixth Pay Commission is to be constituted and it would take at least two years for its recommendations to come through.

A 60-70 per cent hike in wages is anticipated; recommendation to counter inflationary pressures on the family budget can only deplete the government's finances unless it also implements other recommendations such as reducing the workforce, and drastically cutting down on public expenditure and taking the downsizing of government seriously. Can coalition politics see this through?

New look at taxation philosophy

A fresh look at the taxation philosophy is a crying need. India is predominantly an agricultural economy. Unfortunately, it is the non-farm 30 per cent that is being taxed to garner revenue for development. And, again, 70 per cent of this 30 per cent escapes the tax net because it falls in the unorganised sector. The net result is that it is the 30 per cent of the 30 per cent which is organised that bears the brunt of taxation — the corporate sector, manufacturing sector, services class, and the urban middle-class constituting the large white-collar and blue-collar workers.

An overburdened 30 per cent populace cannot be burdened with another dose of levies to subsidise the 70 per cent of the population that goes scot-free. Though the farm sector is the backbone of the economy, it cannot be subsidised entirely — surely rich farmers can pay taxes and user charges for water and power. These systemic defects need to be redressed on a war footing.

Double taxation treaties

The Government needs to look at the double-taxation treaties and remove anomalies that may affect corporate sector growth and investments and, at the same time, prevent tax havens forming outside India.

The services sector is growing fast and the government has to decide if the current levels of taxation are sufficient because higher levels may inhibit their growth. VAT is, perhaps, the best form of indirect tax the government should usher in to reduce production cost, making goods available at cheaper prices to the consumer. The trading class needs to be sensitised to the long-term benefits of VAT. The power sector can be expected to get a sizeable allocation in the Budget as the Finance Minister has emphasised that this sector needs to grow at a faster rate than now.

Divestment of government stake in PSUs is highly debatable. Meaningless divesting of government stake at ridiculously low prices to balance the Budget and reduce fiscal deficit with additional revenue is not a sound long-term economic measure. At least strategic sectors such as oil need to be protected and the new Governments' policy not to divest profit-making ONGC and GAIL is the right step.

The oil sector can be opened up to private parties in a cautious way. Privatisation should bring private capital in vital sectors to raise quality and standards so that the people get world-class facilities at affordable prices. Power sector reforms cannot also take off unless they are accompanied by matching reforms in the supporting infrastructure. Need of the hour are modern and well-equipped ports and airports and quality roads and telecommunication networks. Any shortcoming on this front can turn away foreign investors.

Electricity boards need to be run on commercial lines. No government can afford to commit free power to agriculture and impose a burden on the urban sector. The chief ministers' and power ministers' conference on reforms and implementing a basic minimum power charge on the farm sector has become meaningless as political leaders now ride on the crest of popularity by offering power free to farmers.

Stock market, no barometer for economic growth

The stock market is not the true barometer of the economy. Reliable statistics show that only 1.6 per cent of the population invests in the stock market. Media hype about market capitalisation being wiped out is just notional and does not affect the economy or the common man, but only the market players. In a country such as the US it makes sense because 70 per cent of the population and institutions invest in the stock market and any crash directly affects the economy or the people who are the investors. But this is not the case with India.

Swelling forex reserves

India now has a foreign exchange reserve of over $100 billion. But a look at the fine print; this money does not actually belong to us. It belongs to foreign institution investors, non-resident Indians. They can pull out any time when they sense political instability. Portfolio investment is hot money and can fly out at the slightest provocation though FDI is more difficult to pull out. South-East Asian markets have collapsed because of buccaneer financiers.

The Government has to use force profitably but the country does not have a matching reserves in terms of export earnings to be able to do so. Export concessions are still not attractive enough for exporters to make a dent in the highly competitive foreign markets. Exporters have also suffered because of the uncertainties of a highly volatile fluctuating exchange market.

Legal reforms for simpler laws

The Congress-led UPA Government also needs to usher in legal and labour reforms. Laws need to be made simpler and the burden of the judiciary reduced . Labour reforms should go hand-in-hand with economic reforms to ensure the working class is protected and enjoys the benefits of liberalisation. Hire-and-fire by the corporate sector is not a guiding principle of economic reforms.

The UPA faces a Herculean task and it has to marshall its best talent and reserves and wisdom to make a success of it , especially given the compulsions of coalition politics .

(The author, a former Economics Editor of PTI, is a Corporate Consultant. He can be reached at tna24@sify.com)

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