The Hindu Business Line : Govt must walk the talk on reforms: NCAER

THE National Council of Applied Economic Research (NCAER) has warned that the Manmohan Singh Government "runs the risk of squandering the goodwill if it does not quickly institute far-reaching economic reforms" since "the reform signals are mixed, even from the Finance Ministry on tax reform".

In its Macrotrack monthly bulletin on UPA's first six months, the policy research thinktank said that there has been "a lot of talk but very little action with clear impact on the ground. This is partly because of pressure from the Left and partly because of the non-Left allies in the UPA, who, it appears, have not given up the dirigiste mindset of the 1970s. Their natural tendency appears anti-market and anti-private sector".

Infrastructure, which has been correctly identified as the priority area for reform, remains stuck in the mire of old considerations. The tendency towards price control has resurfaced, as is clear from the pronouncements of the Minister for Steel. The dismantling of the administered price mechanism for oil has been stopped and price controls have been reintroduced.

It said that driven by revenue considerations, the Finance Ministry is not focusing enough on the single most important cause behind poor tax collections — corruption among officials. The sum of all this is that reforms will be "slow and implementation halting". Putting the blame on taxmen for being "slack", the Council said that this is where the Finance Ministry needs to focus. "Fine-tuning taxes is all very well, but unless it focuses on the rot in the tax departments, attaining fiscal responsibility and budget management (FRBM) targets will remain a distant objective. Reform, like charity, must begin at home," the Council observed.

However, on the macro-economic side, the Government's performance during the last six months has been satisfactory with inflation appearing to have stabilised. On exchange rate, it said, the Government has performed well by deciding not to maintain a pre-determined value of the rupee, albeit within a band, which has now shifted towards a more realistic value. The only question now is how soon the rupee will reach the 43/dollar mark, the Council quipped.

One noteworthy achievement of the Government, it said, is that implementation of the State-level value-added tax (VAT) on April 1, 2005 now looks feasible. The latest indications are that almost all the States have agreed on VAT rates for 500 items, with 250 essential items ranging from agro-products to medicines to be taxed at 4 per cent and the rest at 12.5 per cent. Certain metals will attract a VAT of one per cent. However, items such as petrol, diesel, aviation turbine fuel, agriculture equipment and newspapers would fall in the category of exempted items.

While on the whole the pervading sense is that professionals who are alive to the risks are managing the economy, the Council said that on the reform front the Left has blocked several important moves, as have some members of the Congress. The most important of these is disinvestment, which the Government has all "but ruled out with its policy of selling off only loss-making units which no one may want to buy".

Gross domestic product growth in the current fiscal is expected to be around 6.5 per cent and might increase to around 7.4 per cent next fiscal. More importantly, the contribution of the manufacturing sector to overall growth is on the rise. Industrial growth could be around 8 per cent next year, it said, adding that export growth has been strong, but could weaken if the rupee continues to appreciate and interest rates rise faster than expected.