Prime Minister Manmohan Singh has set himself the task of reviving the animal spirits of businessmen, attracting capital flows to prop up the rupee, revisiting aggressive tax enforcement, and turning around the fortunes of the mutual fund and insurance sectors as he attempts to put the economy back on the rails.
Singh, who has taken charge of the finance portfolio after Pranab Mukherjee resigned to contest the presidential elections, said “problems on tax front” had contributed to the sharp dip in sentiments, an apparent reference to the tax travails of Vodafone Plc and aggressive anti-avoidance measures aimed at foreign investors.
The finance ministry under Mukherjee faced widespread criticism from foreign governments and overseas business lobbies after it changed the laws to retrospectively tax global deals involving Indian assets, an action widely seen as targeted at Vodafone.
An attempt to introduce a law targeted at tax avoidance, known as the General Anti-Avoidance Rules, the implementation of which has been postponed, had also rattled overseas investors in stocks and bonds. Further, many Indian businesses and local units of MNCs have complained about aggressive application of transfer pricing rules.
“On the external front, I am concerned about the way the exchange rate is going. Investor sentiment is down and capital flows are drying up,” the PM said, indicating initiatives to attract overseas capital were on the cards.
Singh also asked the finance ministry mandarins to look into the problems of the mutual fund industry, seemingly a reference to the sharp slowdown in inflows into mutual funds after market regulator Sebi banned the payment of commissions to distributors.
While most experts believe that the Sebi decision is conceptually correct, the ban is seen as one of the factors contributing to a 1.6% dip in assets managed by fund houses. The prime minister, who also referred to the insurance sector, did not get into specifics on mutual funds and it is not clear if a reversal of the Sebi decision, taken during the tenure of previous Sebi chairman CB Bhave, would be considered by policymakers.
According to an official, in the near term, the quickest way to revive the MF industry could be to extend tax concessions to investments in equity mutual funds too.
The Rajiv Gandhi Equity Saving Scheme introduced in the budget this year provides tax breaks to first-time investors in equities.
Sebi has already recommended this to the finance ministry, which is yet to take a view on it.
The new dispensation will also focus on cutting subsidies and reviving investments in infrastructure and manufacturing, say officials familiar with the prime minister’s agenda.
Reforms on the anvil include charging more from commercial and bulk users of diesel and restricting the subsidy on cooking gas to four to six cylinders per household.
Not all populist measures will be junked. The food security bill, which seeks to give right to food for large sections of the population and strongly favoured by Congress President Sonia Gandhi, is also likely to be given final shape over the next few weeks.
Infrastructure growth and investments in manufacturing are other key areas on Singh’s radar.
THE PM'S CORE TEAM While the PM himself will drive the economic agenda and coordinate with his cabinet colleagues, the bureaucracy will be spearheaded by his principle secretary Pulok Chatterji, who will be aided by his batchmate and Cabinet Secretary Ajit Seth.
A long-time colleague and advisor, C Rangarajan, who heads the PM’s Economic Advisory Council and enjoys cabinet rank, could be coopted into various cabinet committees to enable effective coordination between the PMO and finance ministry.
Planning Commission Deputy Chairman Montek Singh Ahluwalia, who holds the rank of a cabinet minister and is a key aide of Singh, is a regular at cabinet meetings.
The PM spent most of Wednesday in meetings with his core team.
The core team, with distinct job responsibilities for key officials, will include Rangarajan, Ahluwalia and four secretaries — revenue, department of economic affairs, banking and expenditure — in the finance ministry.