‘Fisc consolidation not a T20 match’

A Responsible N-Power Like India Must Have Sound Fiscal Policies, Says Kelkar Mumbai: Fiscal policies should promote investment, which would fuel growth and provide employment to the growing young population. This should be the cornerstone of the government's economic road map, according to Vijay Kelkar, head of the finance ministry-appointed committee to suggest a road map for fiscal consolidation.      "With a drastic cut in subsidies, a bigger part of the resultant savings should be channelized towards programmes that lead to creating new job opportunities, including social safety nets such as NREGA which generate employment in rural areas," Kelkar said in a an interview to TOI.      The Kelkar Committee report, which, among others things, recommended increasing prices of diesel and LPG, was submitted to the government on September 3 and was made public on September 29. "Given India's status as a responsible nuclear power, it should also have responsible fiscal policies," Kelkar stressed.      In the report, the former finance secretary proposed a drastic cut in subsidies for fiscal consolidation and warned that any worsening of the currently precarious situation could lead the country to a 1991-like crisis. Describing the current situation, he said India was "on the edge of a fiscal precipice". Kelkar, a former adviser to the finance minister, insisted that his recommendations were not alarmist and the current account deficit could not be financed by monetary expansion since the rupee was not a reserve currency.      Kelkar's tough recommendations have come at a time when the Congress-led ruling UPA government has come under severe criticism for allowing FDI in multi-brand retail.      He said the current high level of fiscal deficit, budgeted at 5.1% of the GDP, could soon rise to 6.1% by the end of the fiscal if corrective steps were not taken soon. A former chairman of the Finance Commission, Kelkar, however, is not in favour of a sudden cut in deficits, but wants all subsidies phased out in about three years.      Asked if such a step is politically feasible, Kelkar said there should be a public debate first. "We have done it before, once in 1991 and then again in 2003-04. So we can do it again. If we debate, some innovative solutions would come out. What is not debatable is the need for fiscal consolidation," he said.      On the question of lower subsidy leading to higher inflation, which hurts the poor the most, Kelkar said that reduction in subsidies could lead to some short-term pain but the government should spend more on employment generation, which would lead to higher growth and benefit everyone. "Programmes for the poor should be centred around employment generation," he said. Emphasizing that his recommendations need to be implemented by 2014-15, he likened it to a Test match. "It's not a T20 match and we can meet targets without upsetting the applecart," he said.      To achieve sustainable fiscal consolidation, it is also essential to return to a high tax-GDP ratio. In 2007-08, it was 11.9% while in 2012-13 this ratio is estimated at 10.6%. "With policy interventions, the shortfall can be limited," Kelkar said. He also prefers a deferral and a comprehensive review of the Direct Tax Code Bill as it is likely to result in loss of revenues.      As for disinvestment, Kelkar believes that it's just re-shifting of the balance sheet. "It's not a retreat of the state," he said. The money raised through the disinvestment process should be deployed in infrastructure, which would foster growth and employment. For instance, the government could move into the sectors where private players would be hesitant to play a role. These include areas such as garbage clearing, public health, cleaning of rivers, recharging of groundwater, urban mobility and so on. "This is important in an economy like India where public investments crowd out private spending," explained Kelkar.      The Kelkar committee identified few innovative instruments in the disinvestment process, which also includes selling minority stakes in entities such as SUUTI, Hindustan Zinc and Balco. Kelkar was confident that the budgeted disinvestment target of Rs 30,000 crore would be achieved in 2012-13. The report has also indicated that if PSUs with large cash balances on their books are unable to find good investment avenues during the year, the government, as the majority owner, should call for a special dividend on 'use it or lose it' principle.      Another way through which the government could raise money is by selling excess land parcels under various ministries which are not generating revenues. The India Development Foundation (IDF), an independent think tank of which Kelkar is the chairman, is examining the international experience regarding how best the land resources can be mobilized for promoting infrastructure investments. It would look at monetizing the land resources of PSUs and other government bodies such as Port Trusts and Railways. Such monetization, in addition to other measures such as widening of the tax base, introducing GST, and disinvestment policy, could be an avenue to stem the alarming fiscal deficit. Such a system exists in countries like Canada, Australia, France, and even in the USA, Kelkar said. Money raised through such methods can finance infrastructure needs, particularly in urban areas. However, Kelkar was  quick to emphasize that this would not happen overnight and needed clearly laid-out policies for it to succeed. Asked if auction of such land was the way forward, he said other models such as offering it to cooperative societies to develop low-cost housing could also be an option.      Kelkar feels that the rollout of GST from April 1, 2013 does not appear feasible. However, the passage of the pending Constitutional amendment relating to introduction of GST in the winter session of Parliament would send out very strong signal to the industry about the government's intent to move forward on the issue. "I am hopeful that with the active involvement of finance minister P Chidambaram, Yashwant Sinha, chairperson of the Parliament's standing committee on finance, and Sushil Kumar Modi, chairperson of the empowered committee of state finance ministers, we shall see some headway. Ideally, all states should come on a common GST platform, but if this is not possible, to begin with a majority of states could begin the initiative, as was the case with VAT in 2005," Kelkar said.