Kelkar reforms? GDP can grow at 13%

The reform measures listed by the Kelkar Task Force, if implemented, will result in the Indian economy growing at a nominal rate of 13 per cent by 2008-09.

Also, by that year, tax reforms are expected to translate into an improved gross domestic product of Rs 1,30,863 crore (Rs 1,308.63 billion).

Higher growth is expected as reforms will not only free more funds for both equity and debt investment, but also prevent misallocation of resources with the elimination of tax-induced distortions.

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Also, improved governance, in terms of better quality and quantity of public goods, is expected due to the easing of fiscal pressures on the government.

While the report expects a higher GDP to have a powerful impact on poverty reduction, it has projected an incremental Rs 78,518 crore (Rs 785.18 billion) of wage income that will be injected into the economy in 2008-09, assuming a 60 per cent labour share.

The biggest beneficiaries will be the states. They can expect an increase in resource transfers of 1 per cent of GDP. States will also benefit from the proposed extension of services and the imposition of state-level value-added tax on imports, which will accrue to them.

Also, the Task Force expects manufactured goods to cost less  due to three reasons: the proposed goods and service tax (GST) rate, at 12 per cent, is lower than the present Cenvat rate of 16 per cent, the removal of cascading taxes, and cuts in Customs duties.

While the GST proposal will result in a one-time increase in the process of services, it will be offset to some extent as service providers will be able to buy manufactured goods at lower prices.

Moreover, medical services, school and college education, and educational and home loans have been proposed to be exempted from GST, resulting in a lower cost of these services.

The Task Force was also of the opinion that if reforms were undertaken to establish a world-class non-discretionary, transparent and sustainable fiscal system, public capital expenditure could go up to 2.9 per cent of GDP in 2008-09 from 2.5 per cent of GDP in 2002-03.

The report anticipates an improvement in credit rating due to an improvement in the fiscal situation, which in turn will spur foreign capital inflows and domestic private investment.

The manufacturing sector will also get a boost as the tax burden will decrease due to a reduction in Cenvat, and Cenvat credit for service tax through the proposed GST. 

For exports too, the report has painted a rosy picture, arguing that the proposed package will set the stage for the establishment of very large manufacturing units catering to global markets. Also, it may free small export-oriented units from the existing regressive tax burden.