'The basic fiscal structure needs correction'

Satish Kumar Kaura is Chairman, Economic Affairs Committee, Confederation of Indian Industry (CII). He talked to V. Venkatesan on the Second Phase of economic reforms.

On Economic Reforms Phase II:

The second phase of reforms is more about going deeper into reforms. If you look at direct taxes, it is about building a bigger base of tax payers. It is about developing a more progressive income tax law and about the need to develop a more tax-payer fr iendly, and more progressive, income tax base where there is less litigation and where the tax payer finds things easier, and continue with low taxation rates. If you look at indirect taxes, it is about simplification of procedures in both customs and ex cise. A substantial reduction in litigation, without frustration among corporates about the delays that are involved in red-tapism should be the feature.

On excise, reforms are about quickly moving towards VAT (value added taxation), and single rate of excise. On customs it is about a substantial reduction in the number of tax rates.

In the next couple of years, we believe that the tax rates will have to go down, and come to the level of the ASEAN (Association of South East Asian Nations) countries. We also believe that the Government needs time-bound, programmes, time-bound long-ter m fiscal policies and discipline itself to follow them. Right now, there is lot of ad hocism, although we are all clear how we should move towards the overall goal. It is creating lot of uncertainty for the corporates.

Even if the economy grows at a very high rate, the basic fiscal structure needs correction. At present, deficit budgeting can only be corrected by two major steps that the government can take. One is very aggressive privatisation. Unlike the half-hearted disinvestment efforts the government has made, there is a need for it to locate strategic partners, and pass on the management of disinvestment. That is bound to give a very good valuation of many companies.

The second is the implementation of the recommendations of the Fifth Pay commission. While the government implemented the salary increases, it did not do enough about the surplus manpower that exists. The government will have to take strong steps to redu ce the number of employees. There are many ideas being floated around such as the VRS (Voluntary Retirement Scheme). In South America, countries such as Chile and Argentina have reduced the number of government employees very successfully. Twenty to 30 p er cent reduction will have a very substantial impact. It depends on how the idea is sold. It would be possible to attempt on very creative ideas. There are a whole lot of departments which have no relevance in today's world. The government needs to get out of many activities when the economy is growing at seven per cent.

On Economic Reforms Phase I:

The first phase of reforms was started while the country was passing through a very dire phase. And reforms were more about licensing. They were more about just reducing the cobwebs, such as sub-rates and very high rates. A little bit of simplification o f the tax regime took place. But very little happened in the financial sector. The nation became more sensitive to the need for reforms. The economy moved from a four per cent rate to the six to seven per cent. There was a jump in GDP growth, even when w e talked about recession in 1999. It was a stage when we realised that the reforms do help to go to a high-growth stage. But the reforms that were attempted in the industrial sector, in the corporate sector, in the infrastructure and in the financial sec tors were not deep enough.

In the infrastructure sector, India has to create more transparency. India has not created a framework that is transparent and stable enough for somebody to say that for the next 15 to 20 years he will get a safe return. One is still not convinced that i nputs in infrastructure are all going to be available through the market mechanism. There is still worry about political interference. Ports, telecommunications, power, roads, all share this issue.

In telecommunications, for instance, let the regulatory authority take independent decisions. The people in power were not comfortable enough to do what was expected of them. The change was rather dramatic for them. The first phase of reforms was used to adjust themselves to the change.

Competition between States is emerging. If you look at Andhra Pradesh, Karnataka and Madhya Pradesh, they have caught the eyes of the investors. This will push other States to follow suit.

On taxation and other revenue mobilisation options:

If you look at the structure of our revenues, we have to move away from indirect taxes to direct taxes. India has to move towards much bigger, broader phase of direct taxation. It is not growing rapidly. The need here is to create a massive infrastructur e, information technology and offices. The agricultural tax base must be broadened. They can start with very rich agriculturists and agricultural areas where big corporates are involved. There are more things like that, in self-employment, for instance. Indirect taxation has to go down.

If you look at countries in Asia, the total tax, VAT, is between 16 and 18 per cent rate. That is what we are also talking about. In addition to that, India has a very high rate of customs duty. It has octrois and sales taxes. India's taxation is in the range of 40 per cent. In indirect taxes, there is no room to increase taxation. But the authorities have to tighten up their compliance. But actually, revenues are going to come from direct taxation.

On fiscal deficit correction:

The main area for fiscal deficit correction is that the government should try to cut down expenditure. There is no choice. They can ensure better utilisation of subsidies for the purposes they are meant for. Transparency in the prices of services that ar e available from the government is another step. The simplest example is water. People do not pay for the real cost of water. If the pricing is made more transparent, there will be a major change, a very desirable one.

As we move ahead with reforms, we also have to take care of the weaker sections. The government cannot run away from that. The public distribution system may require a little bit of fine-tuning; it needs to be more focussed towards weaker sections and to be more efficient. Maybe the government has to privatise it.

When the reforms began, the government, in its enthusiasm to correct the fiscal deficit, started cutting down its investments in infrastructure. And it decided that investment in this sector should come from the private sector. The tragedy is that the fr amework that would create the transparency in the sector, that would ensure investment-flow, did not happen. On the other hand, the government did not put in sufficient effort to cut down its wastages in expenditure. As a result, long-term developmental investments suffered very badly. Our ability to grow as an economy will be very limited because of this.

There are lessons to be learnt from the country's experience in the telecom sector. The government kept changing the ground rules. Long-term investors are looking for a level-playing field, stability and clarity.

On the need to stimulate savings:

The savings rate in the country is not that unhealthy. It is about 26 per cent overall. The real issue is stimulating growth rather than savings. Cutting down the interest rate on provident fund was very necessary. As inflation is settling down, it is es sential that we send a signal.

On the implications for labour from Reforms Phase II:

Industry needs to communicate more with labour. With the kind of unemployment rate India has, it is very difficult to ensure that. Unless we do some restructuring, it is difficult to compete. We will have to find some via media and hold talks with labour to find a way out. I worry about the right solutions. I do not have an answer. It is very complicated. This is what liberalisation with human face is all about.