Sanguine over the relative ease with which some bold economic policy decisions like diesel price “deregulation” have been taken in recent weeks, finance minister P Chidambaram on Tuesday sought to place the India story aggressively before global investors as he began a four-nation tour aimed at boosting capital inflows.
In Hong Kong, Chidambaram promised more policy action in the days ahead and a relentless focus on fiscal prudence. He also hinted at a revenue strategy entailing an expansion of the tax base rather than a hike in rates and analysts saw this as a sign that Budget 2013 would be devoid of tax hikes.
Keen to avert a sovereign rating downgrade for the country, Chidambaram used the overseas platform to announce that he was aiming to introduce the Bill on goods and services tax (GST), expected to bolster the government’s revenue base, in the monsoon session of Parliament in August and get it passed by December.
On Tuesday, Standard & Poor’s issued an analysis saying a negative outlook for India has a more than 50% chance of getting confirmed.
The minister said he was “very confident” that a rating downgrade won't happen, adding that the new Cabinet Committee on Investments’ first meeting will be held by January end, with key focus on faster approvals for infrastructure projects. The FM projected a 6-7% economic growth for Asia’s third-largest economy this fiscal and 8% for 2014-15 and promised to continue with the economic policy overhaul.
The minister’s visit to Hong Kong, Singapore, London and Frankfurt marks the beginning of New Delhi’s plank of dispatching Cabinet ministers across the world to directly explain to the key figures in global financial centres about the reform measures the country has recently adopted to restore investor confidence. Chidambaram will later visit New York and Dubai. India needs capital inflows to bridge a current account deficit that has swelled to a record $22.31 billion or 5.4% of the GDP in the quarter ended September 30.
Even as Chidambaram told investors in Hong Kong that the General Anti-Avoidance Rules or GAAR that unnerved investors earlier in the year had been efficiently handled (“the ghost of GAAR has been tamed”), key policymakers back home have made progress in indirect tax reforms. FE has learned that two committees led by revenue secretary Sumit Bose have given separate reports about the structure of the proposed GST and issues related to compensation to state governments to an empowered panel of state finance ministers. “The reports submitted on Tuesday, however, have left the issue of a GST rate to the empowered panel to decide for itself,” said a source.
The FM said fiscal prudence will be a key part of his budget and pledged to deepen economic policy overhaul by implementing GST. For the time being, the focus is on expenditure control, but going forward, expanding tax base would be key to fiscal correction.
“It’s absolutely important to signal to the world that we are on the path of fiscal consolidation,” overseas reports said quoting Chidambaram. Approval for GST by December is ambitious but doable, he said.
He was confident of not breaching the country's fiscal deficit to his target of 5.3% of GDP this year “under any circumstance”. The idea is to improve tax collection and expand the tax base to progressively cut fiscal deficit by 0.6% until it falls to 3% in four years.
He is also hopeful of restricting fiscal deficit to 4.8% of GDP next fiscal. India is curtailing spending in the short term but hopes to stick to fiscal consolidation path by increasing revenue by simplifying tax procedure, not by raising tax rates. The recent rail fare raise itself may add $1 billion revenues.
Chidambaram said he would like interest rates to moderate, an apparent appeal to the RBI which is preparing for a monetary policy review on January 29. For the central bank, wholesale price inflation at 7.18% in December is still a concern. The finance minister said the final call on borrowing costs rests with the RBI.
The minister said there is no reason for a credit ratings downgrade. Standard & Poor’s and Fitch Ratings had last year warned of stripping the country of its investment-grade credit rating on risks including fiscal and trade deficits.
The minister said the country has taken small but significant steps in the recent past. “Add all these together, and we will see we have traveled quite a distance. There’s no case at all to downgrade India,” he said. The minister explained to the investor community about last week's freeing of diesel price from government control that could eliminate oil subsidy entirely in two years, opening up retail and aviation businesses to greater foreign ownership, setting up a cabinet panel to clear pending major investment projects and easing of rules on foreign borrowing for select businesses.
Chidambaram also told investors about last month's relaxation in foreign borrowing limit for both the government and businesses. In December, foreign investment limit in government securities and corporate bonds were raised by $5 billion each, extending the overall foreign institutional investment limit in Indian bonds to $75 billion. The ceiling for government securities were raised with no residual maturity constraint. Besides easing the liquidity crunch, the move is expected to help rupee appreciate and help in bridging current account deficit.
The finance minister told a news agency that it was universally acknowledged that the country has handled the GAAR situation fairly effectively and buried the “ghost of GAAR.” The rules introduced at the beginning of the fiscal to check aggressive tax avoidance was diluted last week. GAAR will now come into force from April 1, 2016 as against the original schedule of April 1, 2014. Chidambaram held the changes made to the rules were fair, just and non-discriminatory.