investment levels, difficult export performance, weakening consumer demand and an uncertain global economic environment. It needs to identify the critical ingredients of growth and address them through appropriate policy interventions.
Restarting investment demand, a crucial catalyst for reviving growth, should be a top priority. Business sentiments in the economy are currently weak, causing investment activities to shrink rapidly. In the first three quarters of the current fiscal, new investment projects announced declined by around 50% over the corresponding period last year. While recent reform measures have helped in mitigating negative sentiments of investors, more needs to be done to accelerate the pace of overall investment.
To rejuvenate investments, the Confederation of Indian Industry (CII) recommends quick and time-bound clearance of 50 large projects with the intervention of the recently instituted Cabinet Committee on Investment (CCI). As many approvals derive from states, they should be encouraged to set up similar investment boards, in line with CCI, under the chairmanship of chief minsters.
Additionally, allowing accelerated depreciation for investments in plant and machinery from the present level of 15-25% for a pre-defined period of 3–5 years is crucial for lifting investment. Project developers can then obtain full tax advantage of depreciation in a shorter period of time, incentivising fresh investments without affecting government revenues. Similarly, a weighted tax deduction on expenditure incurred by companies ‘going green’ could be considered.
Much investment can emanate from public sector companies, which enjoy a pile of investable cash. Their role becomes especially critical since private sector investments have been declining. However, government companies have shown faster rate of contraction in new project announcements than private ones in the current fiscal. Central government-run companies alone are holding an estimated investable surplus of about R2.5 lakh crore, which may be used for building new capacity. This will stimulate overall investment in the economy by way of various forward and backward linkages.
There is also a need to prop up investment activities in the real estate sector, which, through its close relations with other sectors, would help revive overall economic activity. Given the growing demand for housing from the lower middle income population, it’s critical to promote low-cost housing. Currently, the government offers interest subvention of 1% for housing loans up to R15 lakh, provided the housing cost does not exceed R25 lakh. It would help if the scheme is extended to a total housing cost of up to R35 lakh.
Industrial output has also remained lacklustre in the past several quarters, given the linkages between investment demand and industrial output. A stimulus package comprising cuts in excise and service tax rates would have been in order. However, this won’t be feasible in the light of uncomfortable fiscal deficit, and CII suggests that the present rates of excise and service tax rates may be maintained. Further, the implementation of the much-delayed Goods and Services Tax (GST) could serve as the elixir for reviving growth prospects. But given the prevailing uncertainties regarding its implementation, there is a case for reducing the Central Sales Tax (CST) from 2% to 1%. This would help in improving the overall competitiveness of the Indian manufacturing sector, especially crucial as exports, too, have been contracting. We also recommend customs duty to be retained at the current level of 10%, as global excess capacities could find their way into the Indian markets with lower rates.
It’s also important to abolish surcharge and cess from corporate tax. This will help companies pass on the benefit to consumers and generate additional retail and investment demand. Similarly, exempting infrastructure and SEZ firms from the levy of Minimum Alternate Tax will help attract new investment in the sector.
While sustaining the current momentum of economic reforms, we hope that budget 2013-14 would provide a fillip to overall investment activity, which is critical for addressing the multiple challenges to economic growth.
Chandrajit Banerjee is director general, Confederation of Indian Industry
The views expressed by the author are personal