Being a pre-election Budget, it would be difficult for the Finance Minister to reduce big ticket expenditures on subsidies and income generation programmes. In fact, he will be surely under pressure from his cabinet colleagues and coalition partners to increase these outlays. This is inevitable, and so the practical step would be to try and ensure that the effectiveness of these subsidies and efficiency in implementing them is raised. I have received some positive feedback on this from my rural friends who say that there seems to be a stronger drive and determination to ensure that funds allocated under these schemes do not remain unutilised and the benefits actually reach targeted groups. This is indeed welcome. I hope the Finance Minister will look at the Pradhan Mantri Gramin Sadak Yojana experience, where apparently better results have been achieved because of monitoring by NGOs. This could easily be adopted for other schemes.
Moreover, I hope that results from the pilot survey launched by the finance ministry on the use of smart cards in the public distribution system are now available. I had initially suggested this scheme more than two years ago as CII?s chief economist. It was a project to be undertaken in four districts in states willing to try out the experiment. There is, in any case, positive feedback on the use of education vouchers by a Delhi-based NGO. It is time, therefore, to attempt a shift to the use of vouchers and smart cards that will empower beneficiaries and introduce the much-needed competition in the delivery of subsidised public goods and services. Given the nature of our democracy, transfer payments and subsidies will continue for the foreseeable future, and so it is important that we achieve the desired results, which, if achieved, will help improve equity and make the growth process more inclusive.
The Finance Minister will do well to take advantage of the buoyant tax revenues to rationalise the indirect tax structure, even if it means a loss of some tax revenues on this count. The outstanding candidate for this is the indirect tax structure for petroleum products. Estimates of indirect tax incidence on final petroleum prices vary from 30% to 57% (my information), which are much too high. Lowering these will allow the government to increase the payment to oil retailers without having to raise retail prices for consumers. Assuredly, lifting the subsidy on cooking gas will not affect electoral prospects. On kerosene, in the same somewhat politically infeasible strain, the Finance Minister might as well distribute cash to all kerosene card holders to the tune of this fuel?s subsidy bill. This will achieve both goals of raising the welfare of the targeted poor and reducing pollution from the use of adulterated diesel. Is there any valid argument for continuing the kerosene subsidy?
It is perhaps infeasible and also inopportune to expect a further general reduction in peak import duties this year. The rupee appreciation of about 16% over the last year has already made imports that much cheaper and the domestic industry can justifiably expect a respite. Also, we are currently in the midst of several bilateral free trade agreement negotiations, and the Doha Round is also alive though undeniably sputtering. It may, therefore, be pragmatic to pause the unilateral reduction of import duties this year. However, it would be useful if the pause is used to eliminate all anomalies and cases of inverted duties.
This year, some of the exceptionally high import duties in the non-agriculture sector (for example, on cars, motorcycles and wines & spirits) could be lowered to bring them in line with the general duty structure. A study by Dr Badri Narayan and Pankaj Vashist at Icrier has found that existing high import duties for completely built-up cars and motorcycles yielded an effective rate of protection of more than 150% to auto assemblers. Major foreign auto companies are simply importing CKD kits at 7.5% and using mere screwdriver technology to roll out ?domestically manufactured cars?. The trend is catching on even in the motorcycle segment. One such ?assembler? has announced a CKD-based vehicle for less than half the price of existing models. With our component industry turning globally competitive and with major car makers using indigenous components to roll out vehicles for under $4,000, the ?infant industry? argument for tariff protection is no longer valid. Further, the other rationale of attracting tariff-hopping investment into this sector is not relevant, with all the world major car and motorcycle producers already in India. My considered suggestion, therefore, is for the industry to demand a level playing field in the delivery of required infrastructure, labour laws and better business environment, and let go of the last vestiges of protectionism. This will clear the decks for addressing the high import duties and non-tariff measures currently in place for agriculture products.
The author is director & chief executive of Icrier, a Delhi-based thinktank, and member of India?s National Security Advisory Board
