News Update

Indian Port Bill 2021 will enable optimal management of coastline: MoSJ&K politicos meet PM; say Modi Govt is keen to restore statehoodIndia successfully test-fires 1000 km subsonic cruise N-capable missileI-T raids in Raipur unearth Rs 6 Crores illicit cashWorld Bank lends USD 32 Mn for bolstering healthcare in MizoramApple HomePod merits classification under SH 8517 6290 of the CTA, 1975: AARIncome tax raids 4 premises of hawala operator in Raipur; Cash worth Rs 6 crore seizedMukesh Ambani says Jio to use Google Cloud for 5G services + Rs 75K Crore investment in clean energyGST - Rule 108(3) of Rules, 2017 - Requirement of submission of certified copy of order appealed within one week - Interests of justice ought not to be constrained by a hyper-technical view - Appellate authority to adopt a liberal approach: HCGST - Section 107(4) of CGST Act, 2017 does not preclude the appellate authority from condoning a delay of a longer period: HCBrazilian SC admits lower court judge was biased against ex-President LulaST - Non-cooperation and absence of truthfulness - Settlement of disputes can never be claimed as a matter of right - CCESC was not in error in sending matter back to the adjudicating authority: HCBRICS nations to hold R&D conclaves on healthcare, energy solutionsCOVID-19 - Lab-leak theory - Missing 'smoking gun' puts House of virologists on 'fire'!India attracted USD 6.24 bn FDI inflows in April monthCus - Service by indirect methods, such as publication and affixture must be only after service by direct means set out in s.153 have been attempted and established to have failed – no proof of having served SCN – principles of natural justice violated: HCPMI peaks to 59.2 for June month for EUI-T - Co-operative banks are primarily co-operative societies & so any interest/dividend earned from such co-operative banks would be eligible for deduction under section 80P(2)(d) : ITATTax Inspectors Without Borders Program launched in Bhutan; India partnersI-T - Disallowance of delayed deposit of contribution received by the employees' towards PF & ESI is not tenable where such contribution is made before due date of filing ITR: ITATI-T - Unless assessee offered income for taxation, TDS cannot be given credit: ITATI-T - Interest on unutilised grant has to be treated as part of grant itself and cannot be subjected to tax: ITATI-T - Simply because progress billing was more than stage of percentage of completion, the same in itself, is no basis to usurp consistent method of accounting followed by taxpayer: ITATBombay HC gets 4 Addl Judges & one for Kerala for two yearsGovt sets up 3-member task force on bureaucratic reforms - Mission Karmayogi; Former Infosys CEO Shibu Lal given taks with Govind Iyer and Pankaj Bansal of PeopleStrongGovt notifies Draft Cantonment Land Administration Rules for better management of land poolCOVID-19 - India reports 54K cases with marginally less than 1000 deaths in 24 hours + US, UK register rise in Delta variant cases + Global daily death count once again goes above 8000Anti-virus Software titan John McAfee commits suicide in jail after Spanish HC okays extradition to US on tax evasion charges involving cryptocurrency fraud caseUS embargoes import of solar products from Xinjiang province in China
Modi Govt to shift gears from incremental reforms to innovative ones

APRIL 03, 2016

By TIOL Edit Team

A slew of recent reports on India from International Monetary Fund (IMF) should reinvigorate Modi Government's political will to take up reforms with focus on medium and long terms prospects for inclusive growth.

The Government has so far relied on incremental reforms and exploited the persisting trends in commodities market especially oil for short-term fiscal consolidation. It has taken benign external environment to defer expenditure reforms, labour reforms and other structural reforms. There is hardly any indication from the Government that it would make the reforms broad-based and thus growth more wholesome and sustainable.

BJP-led NDA has flaunted the increase in growth of gross domestic product (GDP) during the last two years as solely due to it being in the saddle. The fact is that growth momentum and fiscal improvement is primarily driven by slump in global prices of petroleum, fertilizers and other commodities.

IMF has estimated that favourable terms of trade especially for imported crude oil has resulted 2.5% of GDP gain for India.

As put by IMF Staff Report on India, "following the U.S. oil revolution, with oil prices falling by 51 percent in the first year, Indian growth increases by about 0.3 percentage point after one year-either directly through higher urban consumption spending and lower input cost for corporate sector or indirectly from trade with the rest of the world (as global growth increases by 0.2–0.4 percentage point). The oil glut also creates a moderate temporary disinflation pressure in India (80 basis points on an annualized basis over 4 quarters) and boosts equity prices over the medium-term."

What IMF has refrained from stating is that growth would have been higher had the Government not resorted to successive hikes in excise duty on petroleum products to manage its fiscal deficit. The Government must utilize the additional tax revenue from petroleum sector to create a price stabilization fund (PSF) whose corpus can be used to manage volatility in global oil prices in future.

India's dependence on imported oil would have been less if successive regimes had ploughed back about Rs 100,000-crore proceeds of cess on indigenous crude levied since 1974 into the sector. A very small fraction of this amount has been used for development hydrocarbons and petrochemical industries.

It is here pertinent to quote Asian Development Bank's (ADB's) working paper (WP) on Norway's experiences with managing petroleum revenues starting with its first oil discovery in 1969. The paper, released last week, notes that Norway created in 1990 the Norwegian Petroleum Fund as a fiscal policy tool to underpin long-term considerations in phasing in of petroleum revenues into its economy. The Fund's name was changed to Government Pension Fund-Global (GPFG) in 2006.

WP says: "GPFG is one of the biggest sovereign wealth funds in the world, amounting to 4,397 billion NOK, equal to USD 733 billion."

The Fund acts both price stabilisation mechanism and as a tool for long-term wealth accumulation for future generations.

The Finance Ministry should draw a lesson from Norway and other countries (both oil exporting and importing countries) that created dedicated funds for petro-products price stability and long-term growth.

Modi Government must thus utilize accumulated cess money to give a big push to oil & gas exploration and production. Simultaneously, it should set aside additional excise and customs revenue from oil sector to create petroleum products PSF. It should do so keeping in mind that global oil price would remain subdued over a couple of years.

As regards other delayed initiatives, expenditure reform is an area that is crying for attention for long. The UPA's policy paralysis typified by repeated deferring of urea price hike for years and delaying its inclusion in the nutrients-based subsidy persists. It has prevented balanced fertilization of crops and increase in crop yields, apart from subsidy savings.

The Government must unveil an expenditure reforms agenda by keeping in mind that expenditure efficiency as important as revenue collection efficiency in management of fiscal deficit.

IMF's staff report has rightly reminded about delayed or slow-paced tax reforms including direct tax code by stating that "India's revenue-to-GDP ratio remains considerably below its emerging market peers."

The Government should also give requisite importance to IMF's concern over "anemic exports as well as headwinds from weaknesses in India's corporate financial positions and public bank balance sheets."

Another IMF report on India's ‘Selected Issues' has underscored the prospects of rise in corporate loan defaults and the consequent need for additional recapitalization of banks.

The report projects: "The stress tests of corporate balance sheets confirm that exposure to potential shocks continues to be high. In extreme stress conditions-captured by the unprecedented combination of extreme adverse shocks calibrated to India's experience in the aftermath of the global financial crisis and the 2013 "taper tantrum"-the corporate sector's debt-at-risk could reach 42 percent."

This calls for fiscal cushion by the Finance Ministry to manage the impact of three potentials risks on NPAs. The risks are: rise in domestic & foreign interest rates, depreciation of the Indian rupee and further decline in corporate profitability.

Modi Government also has to do much more than what it has done so far in realm of sector-specific reforms and labour reforms. An IMF working paper on admitted the challenges in implementing labour reforms.

WP captioned ‘Macroeconomic Impact of Product and Labor Market Reforms on Informality and Unemployment in India' has concluded "that less regulation increases GDP, and reduces both informality and unemployment in the long run. The effects of labor market deregulation are stronger than those of product market deregulation."

The reduction in the informal nature of a large chunk of economy and labour market can also lead to increase in tax revenue.

WP says: "by adding the tax evasion and corruption aspects of informality, it might be interesting to quantify the impact of deregulation reforms on improvements in tax receipts of the government, and thus on fiscal deficits in emerging economies. This would require a more detailed modeling of the fiscal side of the economy in our framework."

T o sum up, the Government should shift gears from incrementalism to innovative reforms.