Restoring investor confidence to be top priority in 2013

Restoring investor confidence and reversing economic slowdown which kept the Finance Ministry in a difficult year would continue to be its priority in 2013 with everyone looking forward to the Budget to be presented by new incumbent P Chidambaram two months from now in February.

The economic turnaround, however, may take time and more efforts on the part of the government as well as the Reserve Bank of India (RBI), as global factors do not indicate the possibility of a strong revival.

Chidambaram has already suggested that some 'bitter medicine' was needed to put the economy back on the path of fiscal correction and address other issues to spur investments and remove bottlenecks to infrastructure spending.

As regards growth, it had slipped again after recovering from the slowdown, which was witnessed after the 2008 global financial meltdown mainly due to global economic problems and domestic woes.

The growth rate during January-March (2012) quarter slipped to a dismal 5.3 per cent reflecting continued sluggishness. The first three months of the year witnessed the slowest growth in the past several years.

The decline becomes more glaring when viewed against the annual growth rates of 8.4 per cent during 2009-10 and 2010-11. Pulled down by the January-March quarter, the rate of economic expansion during the 2011-12 slipped to 6.5 per cent.

The downturn during 2012 continued despite serious efforts and pep talk to revive growth by former Finance Minister Pranab Mukherjee and his successor P Chidambaram. The growth rate during the April-June quarter turned out to be 5.5 per cent slipping to 5.3 per cent in the July-September quarter.

The latest data released by the Central Statistical Organisation (CSO) revealed that the growth rate during the first half of the current financial year declined to 5.4 per cent from 7.3 per cent a year ago.

The continued sluggishness of the economy prompted the RBI as well as the Finance Ministry to revise their growth projections for the current financial year. While the RBI has lowered the growth forecast for 2012-13 to 5.8 per cent, the Finance Minister's latest Mid-Year Review has pegged it at 5.7-5.9 per cent.

The latest estimates are far below the Budget projection of 7.6 per cent, and RBI's initial estimate of 7.2 per cent for 2012-13. The year has been a difficult one as Finance Ministry officials tried their best to avert the economic slowdown as also firefight the declining investor confidence on account certain tax proposals announced in the Budget.

The controversy began with the then Finance Minister Pranab Mukherjee in his Budget 2012-13 proposing to amend the Income Tax Act, 1961, with retrospective effect to undo the Supreme Court judgement in the Vodafone tax case.

Besides, the General Anti Avoidance Rules (GAAR) proposal to check tax evasion dented investor confidence as the industry feared that the rules would provide unbridled powers to tax officials.

Since the announcement of Budget, the Finance Ministry tried to soothe the nerves of jittery investors through repeated stakeholder consultation. The global and domestic investors, which were quite vocal, wanted clarity in tax laws and deferment of the controversial GAAR.

Prime Minister Manmohan Singh tried to set the economy back on track and sought revival of animal spirits, revisiting aggressive tax enforcement and promising to turn around the mutual fund and insurance sectors.

Singh, who looked after the finance portfolio after Mukherjee quit the government to contest the Presidential polls, appointed a committee under tax expert Parthasarathi Shome to look into the issues with regard to budgetary proposals of GAAR and retrospective amendment.

As Mukherjee moved to the President's House, Chidambaram took charge of the Finance Ministry from August 1 and promised fine-tuning of policies and corrective measures to put in place a stable and non-adversarial tax regime.

"Clarity in tax laws, a stable tax regime, a non-adversarial tax administration, a fair mechanism for dispute resolution and an independent judiciary will provide great assurance to investors. We will take corrective measures wherever necessary," the new Finance Minister had promised.

Under the leadership of Chidambaram, the Finance Ministry initiated measures to speed up infrastructure spending, asking the cash-rich PSUs to increase their spending and also removing the bottlenecks for private sector spending.

Taking on board the concerns of investors, Chidambaram said changes in the laws would be undertaken after taking into account the views of stakeholders and the recommendations of the Shome Committee.

The Shome Committee in its draft report suggested deferment of GAAR by 3 years till April 2016 and prospective changes in tax laws and waiver of interest and penalty in case of their retrospective application.

The run-away government finances, lesser revenue realisation and increased expenditure on account of subsidies, too were a concern and Chidambaram appointed a committee under the Chairmanship of Vijay Kelkar to suggest a roadmap for fiscal consolidation.

The Kelkar Committee in its report suggested that the government should undertake reform initiatives, go ahead with disinvestments and reduce subsidies. Without these, the fiscal deficit could shoot up to 6.1 per cent in the current financial year.

The Finance Minister, after taking into account the recommendations of the Kelkar Committee, unveiled a fiscal consolidation roadmap pegging the fiscal deficit for the current fiscal at 5.3 per cent and to bring it down to 3 per cent by 2016-17. The Budget had pegged the fiscal deficit at 5.1 per cent of GDP.