New Delhi: 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 percent 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 percent 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 percent.
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 percent slipping to 5.3 percent 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 percent from 7.3 percent 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 percent, the Finance Minister's latest Mid-Year Review has pegged it at 5.7-5.9 percent.
The latest estimates are far below the Budget projection of 7.6 percent, and RBI's initial estimate of 7.2 percent 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 percent 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 percent and to bring it down to 3 percent by 2016-17. The Budget had pegged the fiscal deficit at 5.1 percent of GDP.
"This plan is necessary, this plan must be implemented and the government is very serious about implementing this fiscal consolidation plan ... As fiscal consolidation takes place and investors' confidence increases, it is expected that the economy will return to the path of high investment, higher growth, lower inflation and long-term sustainability," Chidambaram had said.
According to the Minister, the government has to continue with the food, fuel and fertiliser subsidies. The outgo on food, fuel and fertiliser subsidies in 2012-13 is pegged at over Rs 1.79 lakh crore.
The government also got Parliament's nod for an additional Rs 28,500 crore towards petroleum subsidy in the supplementary grants. The government has increased price of subsidised diesel and also capped the supply of subsidised LPG cylinders.
Undertaking the reform exercise, the government opened the multi-brand retail sector to foreign direct investments (FDI) and also allowed foreign aviation companies to pick up stakes in Indian carriers.
Besides, the Union Cabinet also cleared to proposal of hiking FDI in insurance and pension sector to 49 percent. However, the proposal could not move forward in Parliament. The amendment to the Insurance Act has been pending in the Rajya Sabha since 2008.
Besides, it also cleared setting up of a Cabinet Committee on Investment, under the Chairmanship of the Prime Minister, for clearing large projects of over Rs 1,000 crore.
As the reform momentum built up, investor confidence improved and was reflected in FII inflows in capital markets.
Foreign investors put in a net Rs 1.2 lakh crore (USD 23 billion) in 2012 taking their total cumulative investment in India's equity market to all-time high of USD 125 billion.
While the government's disinvestment programme failed to pick up in the first seven months of the current fiscal and state-run financial institutions and LIC had to come in to rescue stake sales of ONGC and HCL, there were concerns about its success.
However, with good response from foreign investors in the NMDC issue, the disinvestment programme saw some light. Against the target of Rs 30,000 crore for the current fiscal, over Rs 6,900 crore has been raised so far. Many blue-chip PSUs, including MMTC, SAIL, Bhel and OIL, are in the pipeline.
The Finance Minister exuded confidence that the tax mop up and disinvestment target for the current fiscal would be achieved. Besides, several measures in the form of tax sops are underway for the insurance industry.
Although several steps have been taken by the government and the RBI also hinted at some rate cut in January, the prospect of economic growth in 2013 would depend on improvement in global economy and also the thrust which Chidambaram might provide in his Budget for 2013-14 in February.
First Published: Tuesday, January 01, 2013, 11:16