The Task is Cut Out for FM Arun Jaitley
Investment, inflation and GST top the agenda
The finance ministry must hit the ground running. Here are the immediate tasks before finance minister Arun Jaitley. First, he must build consensus and implement the goods and services tax (GST). This will eliminate the maze of indirect taxes and duties, many administered by state governments, that fragment India into dozens of regional markets. The GST will be federal in nature, so Jaitley needs to build consensus about the GST among state governments. BJP-ruled states had dragged their feet on GST, but with Narendra Modi as Prime Minister, they are likely to shed their inhibitions. The GST will give a boost to the economy by making the tax system simple and transparent. Work on the GST began when Atal Bihari Vajpayee was prime minister in 2000. It will be apposite if the first BJP government to come to power since then were to finally implement it.
Second, Jaitley has to focus on boosting real investments on the ground. The liquidity crisis is over: India is flush with funds pouring in as debt and equity. But unless much of these funds translate into shovel-ready projects, the excess liquidity will create bubbles in asset markets, with devastating effects when they burst. The outgoing government had cleared several large projects; this government should push them. Third, state-owned banks need funds to expand and grow, and a cash-strapped government cannot afford to recapitalise them. Jaitley’s work here is cut out by the Nayak committee’s suggestion: to form a holding company for government’s shares in banks and use that equity to raise new funds for state-owned banks. Asset reconstruction companies (ARCs) should buy off the banks’ bad debt and, with government support, a debt market must mop up the ARCs’ bonds.
Finally, inflation is high and concentrated in food, which the RBI can do little about. The government must dump large volumes of grain, across many small markets, to curb grain prices. For fruit and vegetables, statelevel APMC Acts should go. And rural power must be ensured to run cold chains.