January 10, 2002

   The Finance Minister Shri Yashwant Sinha, Ministers of State Shri Balasaheb Vikhe Patil and Shri G.N. Ramachandran, met leading economists today as part of the pre-budget consultations. Finance Minister drew attention to the slowdown in the Indian economy and enumerated the reasons thereof and policy measures initiated to kickstart the economy. With a view to reverse the slowdown, Government has responded by cutting down the tax rates in both the direct and indirect taxes and lowered the interest rates by reducing administered interest rates. The Government has not faltered in its commitment towards economic reforms. Reform is a continuous process. Reforms have so far mainly focussed on non-agriculture sector. Agriculture is a difficult area where the reforms have to be initiated in collaboration with the States. So far Governments attempt to decentralise procurement has not received wholehearted support from the States with both surplus and deficit States resisting the move.

    On the fiscal side, there has been slippage in revenues due to the economic slowdown but non-plan revenue expenditure has been strictly contained. At the same time, as a deliberate policy measure the government is receptive to higher capital expenditure. As regards the State finances, the situation is not very comfortable. The pressure from States to provide more money inevitably puts pressure on the Central Government finances.

    Finance Minister posed certain pertinent issues in order to get a feedback from the economists.

• What should be done to stimulate demand/investment?
• How to address the fiscal problem in a manner which allows compression of revenue deficit without cutting into capital/plan expenditure?
• What should be the policy framework to attract investment in the infrastructure. While telecom and port sectors have fared well, power sector has languished. Rural roads programme has come out to be a path breaking initiative.

    Although international best practices have been adopted in the capital market much needs to be done to foster good governance. Also there is need to harmonise autonomy and accountability in public financial institutions.

    Globalisation is both a challenge and opportunity. Reduction in tariffs and dismantling of quantitative restrictions has brought to the fore the issue of protection and its time frame.

    In a wide-ranging deliberation, the economists made a number of suggestions for the forthcoming budget. Some of the important suggestions made by the participants included the following:

• Slowdown in the Indian economy has not been as pronounced as in other countries. Slowdown is more in the nature of a cyclical downturn.

• Need to shift the focus of reforms from organised manufacturing sector to agriculture, informal sector and the small scale sector which employ bulk of the labour force.

• Need to redirect expenditure in agriculture from subsidies to investment; make lending for agricultural investment easier and faster; institute special Fund for agriculture development and adjustment and strengthen Rural Infrastructure Development Fund and; rationalise support price mechanism.

• Provide greater flexibility in the operation of food for work programme

• Diversification of agriculture to non-foodgrain crops, food processing etc. must be promoted through higher rural infrastructure investment.

• Protection for agriculture sector to be made in a manner which encourages diversification and promotes higher value addition.

• Persevere with the tariff reforms so that import tariffs are brought down to the levels prevailing in East Asia.

• SSI reservations must be removed now that all import quantitative restrictions have been removed.

• Interest rates need to be market determined. They are currently too high because of high administered interest rates. Y.V. Reddy Committee Report on Small Savings should be implemented.

• In the backdrop of slowdown, fiscal management should focus on quality of expenditure and containing revenue deficit. This will provide room for much needed public investment, augment growth and increase public savings.

• Fiscal responsibility must be pursued even if there are some changes due to economic slowdown.

• Service Tax must be made comprehensive and should not be levied on a selective basis as at present.

• As movement is made in the States towards the VAT system, there needs to be much more harmonisation and convergence in tax rates within and across States.

• Press ahead with efforts to simplify, rationalise and broaden the tax base. Remove tax incentives/exemptions. This will ultimately help in raising tax to GDP ratio.

• The enactment of the foreclosure law is essential for the treatment of non-performing assets and to restore the financial health of banks and financial institutions.

• Focus in power reforms must be to reduce or eliminate theft and pilferage. The Central Government must put strict conditionality on State Governments to carry out reforms when providing funds.

• Implement announcements made in the budget e.g.

• Labour Reforms.
• Abolition of Sick Industries Act.
• Management of the Food Economy.
• Fertiliser pricing reform etc.

    The meeting was attended, inter alia, by Dr. Kirit Parikh, Dr. Surjit Bhalla, Dr. Y.K. Alagh, Prof. Vikas Chitre, Prof. C.D. Wadhwa, Shri V.K. Srinivasan, Mr. Suman Bery, Dr. Jagdish Shettigar, Prof. M. Govinda Rao, Smt. Indira Rajaraman, Shri B.M. Dholakia.

    Secretary Economic Affairs, Secretary Revenue, Secretary Expenditure, Adviser to the Finance Minister and other senior officials in the Ministry of Finance attended this meeting.