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The Union Budget 2008-09 presented by Palaniappan Chidambaram may have given a stimulus to consumer spending, waived loans to farmers, reduced taxes but it completely ignores the policy reforms recommended by the Economic Survey prepared by the Ministry of Finance and gives scant importance to removing the bottlenecks in infrastructure that are likely to hold back India’s sustained high growth.
There is no doubt that the economy has moved to a higher growth plane, with growth in GDP exceeding 8 percent in every year since 2003-04. "The growth in the services sector continues to be broadbased. Among the sub-sectors of services transport and communications has been the fastest growing with growth averaging 15.3% per annum during the tenth plan period followed by construction. The impressive progress in the tele communication sector and higher growth in rail, road, port traffic played an important role in the growth of this sector", states the Economic Survey 2007-08.
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The Survey expresses concern that growth in output of the infrastructure sector and its capacity, particularly power, has been relatively modest as compared to the robust performance by services and manufacturing. "The development of adequate infrastructure is a critical pre-requisite for sustaining the growth momentum and to ensure inclusiveness of the growth process." Further expansion in all sectors of the economy will increasingly depend on availability of physical infrastructure and related services", notes the Economic Survey.
Accordingly, the Economic Survey lists the policy reform options before the government.
Urban public transport: Public Transport (bus) systems in metros and large cities must be run by organised private companies that can use modern logistics and back office systems for planning routes and timings, acquiring and analising data on usage densities and running an integrated people movement system. A comprehensive system of road parking fees must be devised and introduced in metros and large congested cities.
Railways:
Freight Corridor: Public sector rail track company to own new tracks and signals. Free entry of private and public-private partnership rail freight companies.
Power: State Electricity Regulatory Commissions should notify rational, credible, cross-subsidy for open access so that it can become a reality. Open access should include access to electricity pillars to string a wire. Accountability for T&D losses on this wire will be with the wire owner and not on the distribution company that owns the towers. Permit private corporate investment in nuclear power, subject to regulation by AERB and AEC.
Coal mining: Amend CoalMines Nationalization Act to allow regulated private entry into coal mining. Privatize old coalmines to improve recovery of "in-placereserves" by 5-10 percent, subject to a professional, independent regulator for safety and environment issues.
Oil: Sell old oil fields to private sector for application of Improved or Enhanced Oil Recovery Techniques.
State owned companies: Complete the process of selling of 5-10 percent equity in previously identified profit-making companies. List all unlisted public sector enterprises and sell a minimum of 10 percent of equity to the public. Auction all loss making state owned companies that cannot be revived. For those in which net worth is zero, allow negative bidding in the form of debt write-off.
Industry: Phase out control on sugar, fertilizer, drugs.
Retail FDI: Allow a share for foreign equity in all retail trade. Allow 100 percent foreign equity in foreign branded, specialized retail chains - luxury brands, consumer durables, semi-durables.
Insurance: Raise foreign equity share in insurance to 49 percent. Allow 51 percent foreign equity in a special category of insurance companies that provide all types of insurance (e.g. health, weather) to rural residents and for all agricultural related activities including agro-processing.
Banking: Allow 100 percent FDI in Greenfield Private Rural-Agricultural Banks. Such a bank would be free to set up any number of branches in any rural or semi-rural area. It would be free to lend to agriculture and allied sectors, agro-processing and agro-input industries anywhere in the country and to any industry located in non-urban area (negative list). Such a bank would also be free to takeover (buy out) other private sector banks. As an incentive, such a bank could be allowed expansion into small towns when the general FDI policy on banks will be liberalized.
Factories Act: Increase work week to 60 hours (from 48) and daily limit to 12 hours to meet seasonal demand through overtime.
Bankruptcy Law: Either introduce a separate section on bankruptcy in the Company Law or introduce a new bankruptcy law that facilitates exit of old/failed management as expeditiously as possible.
Reform options ignored
However, the Union Budget 2008-09 ignores all the above options and it has also glossed over the key sectors of infrastructure except for providing increased allocation to programmess like JNNURM, the Rajiv Gandhi Drinking Water Mission, NHDP andhealthcare and rural infrastructure. Central assistance under JNNURM has been increased by 25% from Rs.54 billion in 2007-08 to Rs.68 billion in 2008-09. Allocation to the National Highway Development Programme has been increased by 19% from Rs.108 billion in 2007-08 to Rs.129 billion in 2008-09. There has been a 15% increase, over last year, in budget allocation to the National Rural Health Mission (NRHM). Similar grants, such as the five-year tax exemption for constructing hospitals in tier II & III cities, will help alleviate some of the major deficiencies in healthcare, a basic necessity that millions are deprived of in India. The endowment for a 5-year tax holiday for building 2 to 4 star hotels in specific districts, valid for projects until March 2013, will reinforce the tourism infrastructure industry.
The Budget has not paid any attention to the Public Private Partnership (PPP) for building infrastructure. There seems to be close to nothing for ports, airports, urban housing, construction sectors beyond the reduction in customs duty from 7.5% to 5% on project imports.
One of the most regressive moves in the Budget Finance Minister P.Chidambaram’s decision to withdraw the seven-year income tax holiday for new refinery projects as this is likely to adversely impact all the petroleum companies.
The Finance Bill proposes to "add a new proviso in sub section (9) of section 80 1b so as to provide that no deduction under this sub section shall be allowed to an undertaking engaged in the refining of oil if it begins refining on or after the 1st day of April l 2009". Subsection 9 of section 80 1b provides for 100 percent deduction of profits and gains derived from commercial production or refining of mineral oil. The deduction is available for seven consecutive years.
Now the impact of this amendment is that new refineries, which start refining after April 1 2009, will not get the income tax holiday for seven years. Directly affected will be the new refineries already under construction or proposed by state owned oil companies - Hindustan Petroleum at Bhatinda, Indian Oil at Paradeep, Bharat Petroleum at Bina, ONGC at Visakhapatnam and Kakinada.
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