New measures in Indian budget signal turn in economic policy

New Measures In Indian Budget Signal Turn In Economic Policy

In perhaps the most important budget statement in India in years, the government of Prime Minister Rajiv Gandhi announced on March 16 a series of sweeping measures aimed at unshackling the private sector and stimulating economic growth. While a high degree of government intervention in economic activity will still exist, the changes represent a significant attempt to allow the Indian economy to rely more heavily on market mechanisms. In his visit to India scheduled for May 16-17, Secretary of Commerce Malcolm Baldrige is expected to discuss the new Indian approach with the Prime Minister and other senior Indian officials, and encourage liberalizations which would facilitate U.S. trade, investment and licensing ties with India.

Among the most important new policies are:

Delicensing of industries. To eliminate bureaucratic delays and stimulate production, 25 industries will no longer be required to seek an industrial license to establish or expand manufacturing capacity. While this exemption applies only to firms which are not subject to the provisions of the Monopolies and Restrictive Trade Practices Act and to articles that are not reserved for manufacture by the small-scale sector, this change will nevertheless have a positive effect in a wide range of industries. The list of industries where industrial licensing requirements have been abolished includes:

1. Special alloy, SG and malleable iron castings, sponge iron and pelletization.

2. Steel structurals.

3. Electrical equipment, namely: (a) equipment for exploitation of alternate sources of energy such as solar, wind power, and bio-mass including biogas, geothermal energy, tidal power and sea power; (b) steam turbines of and below 20 MW and mini and micro hydel system equipment; (c) power and distribution transformers, poser capacitors, switch gears, electrical motors and GLS lamps; and (d) diesel generating sets.

4. Electronic components.

5. Automotive components.

6. Cycles.

7. Industrial machinery including rubber machinery, printing machinery, footwear machinery, and meat and poultry machinery.

8. Machine tools.

9. Agricultural implements.

10. Miscellaneous mechanical and engineering industries, namely, plastic moulded goods, hand tools, small tools and cutting tools, pressure cookers, cutlery and steel furniture, lanterns of all types, fuel-efficient stoves, and water pumps beyond 10 ohms.

11. Industrial sewing machines.

12. Office equipment, namely, multiplication and reproduction equipment, word processors, cash registers and invoicing machines, dictaphones, and microfilming and microfiche readers.

13. Surgical, industrial and scientific instruments.

14. Industrial and medical gases.

15. Drugs and drug intermediates, namely, rifampicin, dapsone, olofazimine, primaquin, ethexy methlyene malonic ester, nevaldianine, insulin, anti-cancer drugs, vitamin B6, norgestral, piperazine, and new bulk drugs developed through indigenous research.

16. Paper and pulp, namely, writing, printing and wrapping papers from agricultural residues, waste and bagasse and cotton seed linter pulp.

17. Canned fruit and vegetable products, protein and processed foods, vegetable-based weaning food, marine products and cattle feed.

18. Vegetable oils, namely, solvent extractions of oil/oil cakes from minor seeds excluding cotton seeds, and rice bran oil.

19. Soap and cosmetics, namely soap, cosmetics, perfumery and toilet preparations and detergents of standards established by the Indian Standards Institute (ISI).

20. Leather goods.

21. Surgical and medical rubber products.

22. Glassware.

23. Ceramics, namely, refractories and furnace lining bricks, chinaware, potter and sanitary ware, H.T. insulators, tiles, and graphite ceramics.

24. Insulating boards, gypsum boards, wall boards and the like.

25. Printing including litho printing.

Limitations on the application of India's anti-monopoly laws. The Monopolies and Restrictive Trade Practices Act (MRTP) was originally enacted to prevent a concentration of economic power in the hands of a small number of companies. The Act required that all major decisions of companies falling under its purview be subject to Indian government review. In practice, the Act has been more "anti-bigness' than "anti-monopoly,' with a result that Indian firms have been discouraged from expanding and developing economies of scale. In the future, the MRTP will apply to firms with assets over one billion rupees, versus 200 million at present (approximately 13 rupees equals one U.S. dollar). Effectively, this means that only about the 50 largest Indian companies will need to seek MRTP clearances for the projects they undertake.

Reduction in tax rates. The maximum individual marginal tax rate will fall from 62 to 50 percent. The individual exemption will be increased from Rs. 15,000 to Rs. 18,000, eliminating from tax liability one million of the Indian income tax payers.

The maximum corporate tax rate will fall by 5 percentage points, to 50 percent; the rate for trading and investment companies will fall 5 percentage points to 60 percent; and the rate for companies whose shares are closely held will be reduced by 10 percentage points to 55 percent. The government also proposes to reduce rates by 5 percentage points across the board next year, and the following year to eliminate the 5 percent surcharge and the 25 percent surtax on net profit less taxes and 5 percent of capital. At the same time, however, it will also discontinue in a phased manner the 25 percent investment allowance.

Access to capital markets. To reduce the corporate sector's reliance on the public financial institutions, the government will allow firms to pay up to 15 percent interest on convertible debentures, versus 13.5 percent at present. The seven-year convertible debenture is one of the most popular types of corporate security available in India.

Reduction of import duties. To lower high capital costs and improve India's competitiveness overseas, the customs duty on imported equipment for general projects will be reduced from 65 to 45 percent. There will be no duty on equipment for the fertilizer industry. Given the export potential of the leather industry, import duties on machinery for this industry will be reduced from 81.5 to 35 percent ad valorem. The Indian Department of Electronics will separately announce reductions in duties on equipment for electronics manufacturers.

Elimination of export duties. The government will abolish export duties on 12 major items, including iron ore, manganese ore, raw wool, etc. Duties will now be imposed only on coffee, tobacco, mica, and hides and skins.

Other measures. In order to balance the concessions to the corporate sector, and budget calls for a comprehensive crop insurance plan for small farmers and accidental life insurance of Rs. 3,000 for earning members of poor families. It also announces that the government will legitimize past practice by seeking legislation to allow companies to contribute to political parties. A troubling aspect of the budget is that it reports that the Indian government deficit (i.e., net money creation over and above borrowings from the market and the Reserve Bank of India) for Indian fiscal year 1984/85 (ending March 31) shot up to a record Rs. 39.85 billion, more than twice the level ever previously experienced, and projects this year's deficit at Rs. 33.49 billion. To guard against inflation, the Reserve Bank of India has simultaneously announced that it would increase the reserve requirement of commercial banks from 36 to 37 percent. In post-budget commentaries, Indian government officials have stated that given current foreign exchange and foodstock levels, it should be possible to contain inflation, even with the higher deficits, provided this year's monsoon is "normal.'

For additional information on the new Indian budget, inquiries should be addressed to the desk officer for India, Room 2029-B, International Trade Administration, U.S. Department of Commerce, Washington, D.C. 20230.

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