The election season is on. Soon, the current government will make way for a new one and changes in the political landscape will trickle down to changes in policies related to health care, education, energy, water, external affairs and, most importantly, the economy.
Given that our economy is at a crossroads, Business Today brought together five fine minds in Indian business to discuss what the top priorities of the new administration should be: former Union power and environment minister Suresh P. Prabhu; Surjit S. Bhalla, Chairman, Oxus Investments; Samiran Chakraborty, Head of Regional Research (South Asia), Standard Chartered Bank; Rahul Bhasin, Managing Partner, Baring Private Equity Partners (India); and V. Vaidyanathan, Chairman and Managing Director, Capital First Ltd. The discussion was moderated by Associate Editor Shweta Punj. Here goes their (edited) "suggestion list".
ON AVOIDING PROJECT DELAYS OVER ENVIRONMENTAL CLEARANCES:
We need an 'environment advisor' (in all ministries). While working on a project, this person will actually work with the ministries to make sure that all the concerns of the environment ministry are properly addressed.
There is no need to wait till the end of the day to find out that the project I have prepared cannot be implemented because of environmental concerns. What is important is how you adhere to environmental laws without causing delays.
ON REVIVING INVESTMENTS
The level of choking of the private sector is frightening. We need to look at the entire governance framework. The big issue in this country is that the role of government is not clear to the government itself. The mindset is that I want to control every piece of the economy and solve every problem. You see symptoms of that in the form of a very hostile tax administration and unpredictable retrospective taxation. The government machinery has bloated to a size and scale which is unviable.
If you look at all the rights we have incorporated, to meet them and to meet those kinds of service levels, you need a per capita income of $15,000 to $20,000. But our per capita income is less than a tenth of what we are entitled to. You must create an enabling environment so that people can generate income. Only then will people be smart enough to understand how to buy food and health care. And if you don't overspend, you will not have this hostile or extractive tax administration.
Four-to-five years ago, our annual borrowing was Rs 1.7 lakh crore. Now, it is above Rs 5.5 lakh crore. We often mislead ourselves by expressing this as a percentage of our gross domestic product (GDP). It is true that 70 per cent of our expenses are fixed. What is also true is that the government has crowded out the private sector. If we have to deal with this problem in a sequential way, we will take a long time solving it. Two things can break this cycle - leave more money in the hands of consumers, and (the Reserve Bank of India, or RBI, should) take a leap of faith and cut interest rates today. So, if the new government makes a specific resolve, that I am not going to increase the borrowing from Rs 5.5 lakh crore to the next 6 and 6.5?I am going to hold it here and trust me here? I will walk the path and you also move your bit of reducing interest rates and if they work a little in tandem then you can bring down interest rates and people will have some money in their pockets. The big thing which is hurting the process today is that the interest rates have gone up... Home loan equated monthly instalments (EMIs) have gone up from, say, eight per cent to 10 per cent or 11 per cent. That is hitting everybody's pocket.
Second, tax rates. On the face of it we might say that there is no scope for reducing taxes. Because, the fiscal deficit is already constricted. I am definitely of the school of thought that if you reduce taxes?even the 30 per cent if you bring it down to 28 per cent...bring it down to 26 per cent and bring it down to 20 per cent... I would boldly go and say that we can bring it down to 20 per cent over five years... There is a significant section of the self-employed who do not pay their taxes but are constantly concerned about it. So, some compliance will go up. We have to believe that people will pay more taxes at more progressive rates and so on.
ON FUEL PRICING AND OPENING UP MINING TO PRIVATE INVESTMENT
Privately, people will say something and publicly, they will say something completely different. For example, I was in Parliament on drafting of the Women's Reservation Bill. People were supporting the bill but nobody wanted the bill to be passed. It is an unfortunate reality. Do not go by what the Opposition does but go by what the government does. But, if the government itself becomes populist, then the rest of the crowd follows, then that's a problem.
Regarding coal monopoly, nobody doubts that the objective is how to produce more coal, how to make sure that coal production is more efficient. I have a suggestion. Instead of nationalising or de-nationalising the issue, why can't we ensure that we produce and mine more, without changing the ownership? We came up with the idea of franchisees, which has worked quite well.
About bringing market-driven prices for fuel, we should look at the energy security issue in a broader context. We really need to find out ways of becoming more energy secure. We need to diversify the overall energy basket to make sure that we bring in more domestically produced energy into the system.
You might say that why is the country spending so much on Air India, losing Rs 5,000 crore a year, and why are we not breaking the monopoly of Coal India? The government should get to it in right earnest if it has the strength in Parliament, and if it has the guts to go for it. That should be the No.1 agenda. If it does not have the political capital to do that, then there are certain areas in which it can get involved in a non-controversial manner, but it needs to do it very quickly.
For example, we have been talking about the Direct Taxes Code (DTC) for maybe five years now. According to me, the whole 1,000-page income tax document can be reduced to 100 pages literally by abolishing all exemptions. The first step towards business friendliness in India was in 1991. For the next round of the abolition of Licence Raj, we don't need too much of political capital for that. Let's get to the easy ones first and then, of course, move on to bigger items such as privatisation.
ON EASY SOLUTIONS FOR THE NEXT GOVERNMENT
Whoever is going to come to power is unlikely to have a super majority to pass legislative reforms. We have to bank more on executive decisions to get things done. One thing that can be done is to see that whatever has been done through the Cabinet Committee on Investment (CCI) and others in the last 12 months, how can it culminate into fresh investments. What I am hinting at is that while some 300 projects have been cleared by the CCI, we have not seen even a single one coming on board. What is the missing element? It's thought to be the state regulations which are not allowing it to happen.
According to my estimates, almost Rs 3 trillion worth of projects are supposed to get completed in 2014 itself and 65 per cent of them are already finished. That's a lot of capital investment, which is probably not coming on board because of some last-mile issues. Solving these issues is important because there are three factors due to which investment recovery today is getting deferred: high corporate leverage, banking sector non-performing assets (NPAs) and low capacity utilisation rates. You have to address these three things through some kind of policies because it will take an enormous amount of time for the economic cycle to address them. A lot of policy focus should be on getting these projects approved, to get their cash flows running so that the leverage comes down. And if you start doing that, we start seeing an asset market recovery, which helps companies to de-leverage them and the process becomes somewhat self-fulfilling.
Most longer-term issues that we are discussing will lead us to nine-to-10 per cent growth at some point in future. I have always been an optimist. I believe that within five-to-seven years, we should be back in that growth range. In the near term, to get to that level, we would require a lot of ease of doing business.
Surjit S. Bhalla:
The quick policies that the government can do in order to change the landscape of India is to undo everything that the current government has done in the last 10 years. It should repeal the Land Acquisition Act and have a new law; it should repeal the labour laws and have a new law. If you want the bottom half to benefit, then make policies that directly benefit them.
There are seven billion people in the world. Six billion are outside of India. What is so special and unique about us (Indians)? Why can't we learn from what is done elsewhere in the world? You think people don't have poverty, you think people don't have environmental problems? Why is it that we have to reinvent everything? We are not special.
Politics in the name of poor is the worst politics to do.
In Pakistan, they have a Benazir Income Support Programme (and) cash transfers of a much larger scale... They (Pakistan) have it there since 2008. They have a whole-scale programme of scholarships to the needy.
If you talk about Pakistan, they will discredit the idea. Let's not walk that path.
Let them discredit the idea. Unless you shame them, nothing changes in this country.
Whatever facilitates growth and transparency in growth is good governance. All you want is to facilitate private enterprise. Remember, the government's major purpose of collecting taxes is redistribution. It's not something only we are doing. The difference in different countries is how effective they are in redistributing. We are terribly ineffective. And the reason we are terribly ineffective is because we are massively corrupt.
ON DETERMINING INTEREST RATES
> Expedite environmental clearances
> Nix the rights-based economic model
> Repeal the land acquisition act
> Move to cash transfers
> Pare interest rates
> Let the rupee find its own level
> Diversify India's energy basket
> Solve last-mile issues for big projects
We are probably going to see relatively softer interest rates this year because of lower inflation. The bigger issue is that if we get a lot of these supply-side factors sorted out, then automatically the medium-term inflation dynamics will look much benign. The fact that in the last three years we have sidestepped most of these issues and got into a mess on the supply side means that even with a very moderate level of demand, we have significantly higher level of inflation.
We can have executive decisions to make the supply side a lot better. Also, there is a significant amount of 'easy kills' in agriculture/food areas to get food inflation down, starting from lower minimum support price (MSP) to better distribution to more storage creation. If you can address this whole space over a six-to-12-month period, food inflation will automatically come down. Today, we can't believe if somebody tells us that food inflation can be five per cent because it has been more than 10 per cent for the past three years. That belief needs to come back, that we can control food inflation below five per cent, otherwise we will never get to the four per cent inflation target that the RBI has in mind.
To summarise, the interest rate trajectory, as much as it is a function of what monetary policy framework the RBI decides, is also a function of what kinds of executive decision making happens in Delhi.
ON WHETHER THE RBI SHOULD STOP INTERFERING IN CURRENCY MARKETS
There are no questions about it.
You should only intervene in the currency market from (a position of) strength. Never interfere from weakness. Therefore, when the rupee is depreciating because you have high inflation and low growth, you let it depreciate. Right now we are in a stage where we need an appreciating rupee. At 53 to 54 [to a dollar], one should start intervening. But that's intervening from strength. When people want to buy the rupee, that's when you buy dollars and prevent the rupee from appreciating. The fair value of the rupee is around 57. The reason you want the rupee to strengthen is because now it is a sign of confidence for policymakers, investors and individuals. There's lot of gain that can be made from the rupee. Let's get a little bit of benefit from the strengthening rupee and then we can intervene.
ON STRENGTHS THAT THE NEW GOVERNMENT WILL INHERIT
First of all, we are not an undertaxed country. The tax-to-GDP ratio in this country is 18 per cent. Basically our budget is as follows: 18 per cent is the total tax revenues, two per cent is the total non-tax revenues and our expenditure is 30 per cent. This is where you get the fiscal deficit of eight per cent (of GDP). The strength is that we are overtaxed. But there is a problem on the expenditure side. We spend Rs 10 to transfer Rs 1 to the poor. So if we are transferring Rs 1 rupee to the poor, the other Rs 9 is going somewhere else. It is not disappearing in thin air. The good news is that inflation is already coming down. The rate of inflation has come down to around five-to-six per cent. ~
- additional inputs by Jyotindra Dubey and Niti Kiran