The global economic crisis and steps to deal with it have sparked an intense debate on the respective roles of government and markets in economic management. For India, which suffered marked slowdown in GDP growth owing to the external environment, fiscal deficit can no longer be a tool for stimulating the economy.

Instead, the next round of growth must emanate from private sector investments and demand. We, therefore, see Budget 2012-13 strengthening the framework for boosting industry investments while lowering fiscal deficit to 4.1 per cent.

It is worth recalling that the last growth cycle from 2003-04 to 2007-08 was driven largely by the corporate sector which had built up internal reserves. Corporate contribution to the nation's savings, as a percentage of GDP, doubled from 4.6 per cent to 9.4 per cent during the period, leading the rapid rise in the crucial investment-GDP ratio to over 38 per cent before the collapse of the global economy.

Decelerating economic growth over the last year, accompanied by high fiscal deficit, presents an unprecedented challenge for the Finance Minister, as the room for fiscal and monetary manoeuvrability is severely restricted. Industry would like to see an aggressive policy stance in the forthcoming Budget to unlock the potential of private sector initiatives for boosting growth. This is especially important, given that the 12th Plan, commencing in 2012-13, envisions a growth rate of 9 per cent.

Policy initiatives

Incentives to investment as a whole could include increasing the depreciation rate on plant and machinery to 30 per cent for the next two years and simultaneously increasing depreciation to 50 per cent for any retrofitting that is done to make business operations more environment-friendly. These are like stimulus where the government fisc does not get negatively impacted. Another key proposal could be fast-tracking of 100 high-profile mega projects under the aegis of the Central Government.

Private sector participation in key sectors of the economy must also be expanded through policy initiatives. In agriculture, holistic attention to seeds, watershed management, technology infusion, and mechanisation is needed, which requires larger industry presence. A legal process of land leasing could help aggregate small holdings to promote economies of scale and penetration of advanced technology.

The infrastructure sector, in particular, envisages high investments from private industry, including foreign investors, to bridge debilitating gaps. As per the 12th Plan, infrastructure is forecast to attract spending worth $1 trillion, including half from private sources.

A common definition of infrastructure for tax purposes is lacking, and tax benefits should be extended to more sectors, including rural infrastructure, medical education facilities, oil and gas exploration, and so on. The sector also requires a range of long-term financing options such as insurance and pension funds.

A strong public-private partnership approach must be induced in the healthcare sector for affordable, accessible and quality services. The government may consider a combined insurance product with life and health coverage for services to deprived sections, with 25 per cent premium being borne by the patient and the remaining shared between the Central and State governments. Some funds under MNREGA can also be used for skill development.

Given that India's immediate healthcare investment requirements are around $80 billion, infrastructure status to the healthcare industry, as announced earlier, should be rapidly instituted. CII has submitted a detailed PPP model to the Planning Commission for a 200-bed hospital, specifying the responsibilities of the private partner.

Research and innovation

Private sector participation in education can arise in R&D, innovative learning methods, teacher training, educational loans, and so on. For-profit higher education institutes accompanied by education vouchers and strong regulation would ensure greater competition and better quality. Industry would particularly like to be part of the mission of skilling 500 million youth by 2020. A skill development bank could offer funds for self-employment and skill development of individuals as also funds for skill development institutes.

Indian industry also aspires to be at the cutting edge of innovation and R&D, which is possible with enhancing private spending in the sector. Section 35 of the Income Tax Act allows weighted deduction of 200 per cent on in-house expenses on R&D in select sectors; however, this is due to expire next month. It should not only be extended by five years, but also to all sectors of the economy, if India is to emerge as an innovation hub.

Widening tax net

Industry also seeks comfort with respect to the tax system, which can greatly influence direction and form of private sector engagement. The current direct taxes system is complicated and difficult to administer with many loopholes. We expect the new Direct Taxes Code to be introduced by next year. In the meantime, Dividend Distribution Tax and Minimum Alternate Tax can be made more efficient and user-friendly. Widening the personal income tax slabs and offering larger deductions for healthcare, education, and housing payments would boost consumer demand.

Industry has long been anticipating the institution of Goods and Services Tax which would make India a single market and greatly speed up interstate movement of goods. Till then, excise duties and service tax should remain at 10 per cent, while peak Customs duties can also be retained at current level.

In the current difficult global economic environment, Indian industry can seize the initiative for growth and employment creation. It must be given optimal opportunity to do so.

(The author is Director-General, CII. >blfeedback@thehindu.co.in )

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Published on February 29, 2012