Prime Minister Atal Bihari Vajpayee: Determined to push ahead

Noticed how prime minister Atal Bihari Vajpayee has been all business of late? On October 5, he used a fairly straightforward occasion-approval of the 10th Plan document-to inveigh against critics of his administration's reforms programme. Less than a fortnight later, at the first India-Asean meet in New Delhi, he reiterated his government's commitment to public sector sell-offs and economic growth. "Our reforms process continues to target high growth with balanced and equitable development," he said. "Our ambitious GDP growth of 8 per cent exhorts us to stay on this path. There can be no looking back," Vajpayee declared.

It turns out all that may not be mere talk. Unknown to most, Vajpayee has ordered a few trusted bureaucrats in his office (the PMO) to draw up a new, detailed roadmap for India's economic future. The inner-most circle includes additional secretary in the PMO, Pradipto Ghosh; Anup Wadhawan, Director, Prime Minister's Office; Vijay Kelkar, advisor to the Finance Minister, and Rakesh Mohan, Deputy Governor, RBI (See The PMO's Reforms A-Team).

Some 14 different groups of ministers (GOMs) are burning the proverbial midnight oil to put together a blueprint for the "next phase of reforms''. The brief from Vajpayee, BT found out, is all encompassing, covering virtually every aspect of the economy. From simplification and rationalisation of direct and indirect taxes to easing foreign direct investment (See PMO's New Roadmap For Reforms). Says Sanjiv Goenka, Vice Chairman, RPG Group: "The best thing about the PMO's reform package is the thrust on implementation, because that has always been the issue."

To cover as much ground as possible, the PMO is taking counsel from different sources. Finance Ministry advisor Vijay Kelkar's consultative paper on direct and indirect taxes, for example, is based on a large body of proposals made to the government over the last 10 months. Ideas were also borrowed from the Prime Minister's Economic Advisory Council and the Prime Minister's Trade-Industry Council. Wherever any technical problem arose, the PMO set up task forces to find answers. The finer points of the report were discussed between the PMO and the Department of Economic Affairs. And Ghosh, Wadhawan, and Mohan put their heads together to finalise the report, which was cleared by the Committee of Secretaries in August and has since been sent to the concerned ministries for their perusal. Finally, it will be cleared by the Cabinet Committee on Economic Affairs by January-end. Says a PMO official: "All the reforms that we are talking about will be implemented in this fiscal year."

Despite protests from a range of Cabinet colleagues and allies, the Prime Minister has mandated his team to pave the way for public sector disinvestment. While there's some rethink happening on the sale of oil companies HPCL and BPCL because of their strategic importance, there's no such ambivalence in the case of the other 15-odd PSUs, including National Aluminium Company (NALCO). Says a senior official in the disinvestment ministry: "It has already been made clear to Orissa Chief Minister Naveen Patnaik, and Union Minister of Coal and Mines Uma Bharati that there is no question of putting off Nalco's sale. The political will is still very much there, though the focus may have been lost in the last couple of months.''

Besides selling the PSUs, the PMO wants to stop throwing good money after bad in projects that are facing time and cost overruns. The Govindarajan Committee, set up by the government to address this issue, has suggested some "very radical solutions''. It has actually proposed the closure-yes, closure-of long-pending unviable projects. Where the projects look viable, the committee has suggested a private sector partnership. All new projects will be approved only after they have been evaluated on stringent viability parameters.

Getting Industry-Friendly

To kick-start industrial growth, the PMO plans to frontload in the first two years a substantial part of the 10th plan outlay of Rs 16 lakh crore to pump-prime the economy. Besides, nearly 100 projects worth Rs 100 crore each have been identified for completion on a priority basis. More importantly, there are plans for the government to chip in with money if that's the only thing holding up a project. Says the PMO official: "The idea is to get a positive cascading effect on the economy."

What should get corporate India's attention also is the spirit of trust that seems to pervade industry-related reforms. Take Customs duties, for example. The Kelkar Committee has recommended a trust-based system, under which all goods would be imported and exported through a green channel, based solely on the declaration of the trader. "This approach," explains Kelkar, "reduces delays for legitimate transactions while allowing full scrutiny of high-risk transactions."

In his consultative paper, Kelkar has also recommended further rationalisation direct taxes. On the Excise front, he has suggsted reduction of duty rates to four-4, 8, 12, and 16 per cent-and recommended two-tiered Customs duty structure: 10 per cent for raw materials, inputs and intermediate goods, and 20 per cent for finished goods. The Customs duty anomaly has been a sore point with corporate India for a long time now. Says Sanjiv Narayan, President, Electronic Component Industries Association: "How can we be competitive in the global markets if our inputs attract Customs duties higher than those on finished products?"

But the moot point, as always, is, will the so-called proposals work? Most economists seem sceptical, but many see this as the first step of looking at the nuts and bolts of the policy. Says Saumitra Chaudhury, Chief Economist at credit rating agency ICRA: "While policy articulations was never a problem in the country, most policies earlier used to get bogged down in the process details. But for the first time, the government seems to be focussing on the details of the policy, which is a good sign.''

KELKAR AND THE FEEL-GOOD FACTOR

Vijay Kelkar: All for overhauling the tax system If Vijay L. Kelkar is the new face of the Vajpayee administration, then corporate India is going to like it a lot. Kelkar's tax structure reform proposals announced on October 28 this year are atypical of the bureaucracy. Among other things, the advisor to Finance Minister has suggested lowering of corporate tax to 30 per cent from the current 36.75 per cent, scrapping of the Minimum Alternative Tax, lowering tax on foreign companies from 40 per cent to 35 per cent, and allowing companies to carry forward business loss indefinitely. At the same time, Kelkar has suggested the abolition of the dividend tax and removal of all exemptions. Kelkar has also suggested softer penalties for Excise defaulters, drastic reduction in bureaucratic interference, and a halving of Excise exemption limit to Rs 50 lakh on products manufactured by small scale units. The idea, Kelkar explains, is to put India's indirect tax systems on par with the best international practices, encourage voluntary compliance and reduce transaction costs. Says Kelkar: "This is important not only for boosting exports and FDI, but also for creating an appropriate framework for vibrant domestic business.'' On the Customs front, he has proposed a reduction in the peak import tariff of 30 per cent to 20 per cent by 2004-05. Therefore, two Customs duty rates-0 per cent for raw materials and intermediates and 20 per cent for finished products-has also been recommended. Says Sunil Kant Munjal, Managing Director, Hero Honda, and a member of the Kelkar Committee: "The new tax reforms represent a complete change in the mindset of the government. The proposals will not only treat corporates as customers, but will also provide a level-playing field for the domestic companies.''

However, to believe that CEOs of Fortune 500 companies will start investing in India just because they are given a red-carpet welcome would be naive. "When domestic companies are not making investments in the country, how can we expect the foreigners to invest here?'' asks Subir Gokarn, chief economist at Crisil.

It is the unsavoury process details and the long delays in getting clearances from various quarters-the Central and state governments-that deter foreign investment. Can the Prime Minister tame the states and ensure that his dictat is followed, since much of the success of the second-generation reforms will depend on the cooperation of the states? That seems difficult. After all, only seven of the 29 states are ruled by either BJP or one of its allies.

Others believe that the success of the reforms will depend to a large extent on whether the Prime Minister is able to put an end to the turf wars between various ministries-one reason why the Prime Minister had to take everything in his own hands in the first place. "The PMO-induced reforms can only succeed if the Prime Minister can impose his will on other ministries,'' notes Gokarn.

How of much that actually happens could depend-surprise-on how the BJP fares in the Gujarat elections the coming December. According to some political analysts, a resounding victory may embolden Vajpayee to push the 2004 general elections ahead by a year. The reason, of course, being that the chances of BJP and its allies would be greater in the wake of Gujarat results.

Once the BJP is returned to the saddle, the argument goes, it will not only fortify Vajpayee's own position in the party, but also shut up the anti-disinvestment and anti-reforms lobby within and outside his administration. The rationale seems plausible enough. But whether it pans out that way is a moot question. In effect, what could happen this time round is what's been happening: the government will push through the softer reforms, while the harder-but the more important-ones will rermain on the drawing board. Poor PMO, poor India.