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Good beginning, but hurdles ahead

comment Updated: Jul 11, 2014 23:23 IST

Union finance minister Arun Jaitley has struck the right notes on the broader issue of economic reforms in India. For a capital-scarce economy, allowing overseas investors to deploy funds in high-growth sectors is, perhaps, the first step in seeking to spin jobs and multiply income.

In his budget, the minister has clearly stated the NDA government’s position on key issues.

The proposal to form an Expenditure Management Commission mandated to suggest ways and means to prune public spending, overhauling the subsidy regime, easing FDI norms in insurance, defence and real estate are pointers to the new government’s intent to help India rapidly move many rungs up as a business-friendly and rules-based destination.

A modern, competitive economy will have to offer its citizens an abundance of options to positively exploit a basket of opportunities.

This is precisely the reason why it is vital for the government to press ahead with the other critical reforms. Hiking the FDI ceiling to 49% from 26% in the private insurance sector, which was being hobbled by lack of capital, and allowing FDI in the pension sector is more about reversing the slowdown in the economy, and less about allowing foreign investors access to household savings.

India is in dire need of resources to fund its infrastructure requirements. Likewise, market-determined fuel prices are a precondition to reducing the tax burden petroleum carries in India.

A third of excise duty collection comes from petroleum products.

Even with the subsidy in place, petrol costs more at an Indian gas station than it does in the United States. Part of the reason for India’s relative lack of competitiveness among Asian manufacturing exporters is its expensive energy: The latest round of hikes could add up to a percentage point to wholesale inflation. Dismantling its high-cost energy economy has been a crusade India has shied away from for too long.

With the economy’s growth showing little signs of recovering to levels India was used to before 2008, the government cannot afford to turn its attention to factors other than those that ought to raise the trend line. Slower expansion will affect hiring and job prospects.

Weak income growth, on the other hand, will also affect sales of a range of goods. Unless pressing policy and implementation issues are addressed, even achieving and sustaining a 6.5% growth could be difficult.

The proposals on foreign investment norms, reforming India’s leaky subsidy regime and making public spending more targeted are steps that can potentially help the economy gather pace faster than expected.