The Hindu Business Line : An economic stimulus package

From boosting demand for goods and services to cutting VAT, and from splurging on infrastructure projects to taking an immediate decision on spectrum auction, PRABHAT KUMAR suggests a slew of measures that will help the economy weather the financial storm originating from the US.

Automatic clearances may be granted to pending projects so that they are completed in a time-bound manner; this will create demand for labour locally.

The recession in the global economy is now a stark reality. While the US and more than a dozen countries in the European Union are technically facing a recession, counted as negative growth in two consecutive quarters, the economic policy-makers and philosophers are busy deliberating on strategies to deal with the economic slowdown, probably the biggest, since the Great Depression of 1930.

China, has announced a stimulus package of $586 billion for government spending on infrastructure projects and earthquake-related relief work, and is taking a slew of other measures. The Indian policy-makers however, are yet to come to grips with the real nature of the economic slowdown, which is likely to worsen in the months ahead. The latest projection about GDP growth is just about 6 per cent for the current financial year.

Indians, in an international survey, have been found to be the second most optimistic people about the current economic situation, but we cannot escape the consequences of ‘Made in US’ financial meltdown.

Discussions on how to deal with the present crises have so far remained largely focussed on reducing the interest rate and pumping liquidity into the financial system. However, these measures are highly inadequate. The need at the moment is to tackle the problem from several corners. Besides Keynesian measures for large Government spending, other steps need to be taken, and urgently, to redress the grim situation.

Boost consumption, Reduce VAT

The data on excise duty collections for October show a declining trend in revenue collection and, hence, definitely reduced domestic demand. Therefore, to boost local demand, the government needs to cut down on both Cenvat (excise duty rate) and service tax.

Cenvat may be reduced from 14 per cent to 10 per cent, while service tax should be reduced from 12 per cent to 10 per cent till March 2009. This will ensure reduction in the prices of goods and services, which will boost consumer demand. The actual loss of revenue may be only 25-30 per cent of the total anticipated loss arising from a reduction in rates, as the balance will be compensated for by a reduction in Cenvat credit that can be used by the manufacturers and service providers/ recipients.

Further, the losses would also be compensated by the extra demand created in the economy due to reduction in prices of goods and services and consequent better collection of taxes.

Second, the Central Government must coax the State governments to reduce the VAT by 2-4 per cent on different commodities, to bring down the overall prices of goods and services, thus, raising demand for products.

Infrastructure projects

The third measure relates to government expenditure on languishing rural infrastructure projects in agriculture, irrigation, fisheries and horticulture, . involving investment of less than Rs 1 crore in each project. A large number of minor projects are pending approval, in some cases, for many years. Now, automatic clearances may be granted to those pending projects and immediate construction work should be started to complete those projects in a time-bound manner, which will create demand for labour locally, in the villages or talukas in the hinterland.

The strict deadline for completion may be monitored rigorously by the use of monitoring software, which is now easily available off the shelf. The software today contains facilities, where multi-tier simultaneous monitoring can be done by different levels of supervisory authorities to observe the progress of projects.

It is anticipated that an investment of just about Rs 5,000 crore in the short term in such projects will revolutionise the rural infrastructure, leading to long-term impact on rural incomes.

Deadline advancement

The fourth measure suggested is to expedite the construction of all projects handled by the various Central and State government departments, such as the CPWD, the PWD, the Irrigation Department and PSUs. The deadline for completion of all such projects should be advanced in a radical manner. All projects which are likely to be completed in next two years, say by December 2010 should be completed a year in advance, say by December 2009.

Advancement of completion dates will provide a fillip to industrial demand for steel and cement and other inputs in the short term. It will also generate employment for labour, which is facing retrenchment in certain export-related industrial/ non-industrial sectors.

The major advantage here is that the Government need not spend anything extra from its own resources and yet would save on account of expeditious completion of those projects.

Deficit control

Now we turn to generating additional revenues and containing the deficits, overall. It is estimated that the Central Government and State Governments, put together, may incur a deficit of 10 per cent of GDP this financial year. Therefore, it is necessary that other than printing currency notes and succumbing to Keynesian philosophy, the Government must provide extra sources of revenue to contain the overall deficit.

Two measures are suggested here. First, the Government must ban all unproductive expenditure between January and March 2009 in the Government offices, where babus go on a spending spree to use up the remaining money allocated to them. The ‘March rush’, therefore, should be given a holiday this year. Expenditure on only bare necessities should be allowed and there should be a total ban on other kinds of unproductive expenditure. The huge savings should be utilised to fund the new projects.

Spectrum auction

The second measure is to immediately take a top priority decision to go for auction of the 3G spectrum in the telecommunications sector, where the allocation of spectrum has been done in a highly un-transparent manner and the policy followed by the Ministry of Information Technology has hugely and unfairly benefited a few favoured business enterprises.

The Ministry’s allocation is already under attack, as several High Courts and even the Supreme Court have admitted PILs against the methodology use in distribution of spectrum. The Prime Minister, in his own discretion and in the greatest public interest, must reverse the decision and the Government should declare immediate auction in the next two months, which will fetch around Rs 25,000 crore for the government kitty.

This money can be usefully spent for meeting public expenditure to boost the economy and contain the budget deficits accordingly.

The measures suggested above will surely have huge beneficial affects on the economy and Indians can successfully weather the “Made in US” financial storm.

(The author, a former Commissioner of Customs, is a practicing advocate and President of Innovative Radical Reforms Organisation, an NGO. blfeedback@thehindu.co.in)

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