FM Holds Pre Budget Consultations with Finance Ministers

of all States and Union Territories; asks them to play their Part Effectively in Controlling Inflation

Union Finance Minister Shri Pranab Mukherjee held a meeting with Finance Ministers of different States and Union Territories to get their inputs for General Budget 2011-12, here today. This was the seventh such meeting in the series of pre-Budget consultations held by Finance Minister with the stakeholders of different sectors. He held his first meeting on 7th January with the stakeholders of agriculture sector followed by meetings with captains of Indian industry on 11th January, with representatives of different trade unions on 12th January, 2011, with different NGOs on 14th January, 2010, with noted economists on 17th January, 2011 and with banking and financial institutions yesterday i.e., 18th January, 2011.

Welcoming the State Finance Ministers, Shri Pranab Mukherjee in his opening remarks said that this meeting happens to be the third such meeting that he had the pleasure of convening in the past two years. The Finance Minister said that as India grows and globalises, and the domestic market becomes more integrated due to improving physical connectivity and better policy coherence among different tiers of government, the State Governments will have a greater stake in the formulation of Central Government policies, particularly the fiscal policy.

Shri Mukherjee said that this rapid recovery of the growth momentum is comforting, but we cannot be complacent as there are several challenges that the Indian economy faces from its current external and domestic context. He said that global recovery remains fragile and India’s growth momentum, to some extent, is affected by developments in the western world. The Finance Minister said that the increase in international crude oil and other commodity prices is a reality that we are already confronting. High food prices caused, in part, by severe drought conditions last year, certain supply bottlenecks and rising incomes, have been driving food inflation in India, he said. The Minister further said that there has been significant increase in FII inflows even as there has been some moderation in FDI. This changing composition of our capital inflows has implications for the financing of our current account deficit, he said. The Finance Minister said that the challenge before the Government and the monetary authority has been to support the consolidation of growth momentum without compromising on price stability. The task has not been easy, but we have made serious effort, said the Minister.

Recalling his last Budget speech, the Finance Minister said that the Government had outlined a four-pronged strategy to encourage agriculture covering (a) agricultural production; (b) reduction in wastage of produce; (c) credit support to farmers; and (d) a thrust to the food processing sector. He said that the basic intention was to consolidate on gains already made in green revolution area while directing resources for productivity gains in other areas, namely the Eastern region and specific crops like pulses. Shri Mukherjee further said that there has been a conscious effort to improve growth in agriculture credit in the past few years, which has helped investments in the sector. He said that the Minimum Support Prices have also been revised periodically to ensure remunerative prices to the farmers and this has enhanced their returns as well as the capacity to invest for improved productivity. However, it has also resulted in strengthening of cost-push factors in inflation, he added.

Finance Minister, Shri Pranab Mukherjee said that the events in the food economy in the last two years, indicate that the required supply response to the initiatives in the agriculture sector have not materialised adequately. He said that food inflation has remained high and volatile due to significant increase in the prices of a few primary items like fruits and vegetables, milk, meat, poultry, eggs and fish, even as the prices of cereals and pulses have declined sharply in the current year. He further said that while there are some weather induced supply constraints on some of the items currently exhibiting high inflation, a large part of price rise is due to widening gap between the wholesale and retail prices and the growing demand for these products due to rising income levels.

The Finance Minister Shri Pranab Mukherjee asked the State Governments to play their part in controlling inflation, He said that the Central Government has taken measures to facilitate imports and, where required, restrict exports to ensure the supply of essential commodities. Shri Mukherjee asked the State Finance Ministers to urgently look into the supply management of items that are driving the current round of food inflation, in particular the local factors that are widening the gap between the wholesale and retail prices. The bottlenecks in the supply chain have to be removed, said the Minister. He further asked them to take steps to ensure agriculture grows and create efficient distribution and marketing infrastructure. While advocating a cut down on wastage, Shri Mukherjee urged them to review all local level levies like mandi tax and octroi duty which add to prices of food articles and impede smooth movement of essential commodities. He said that there is strong case to review and reform the Agriculture Produce Marketing Act (APMC) in States where it has not been addressed so far. The Minister further said that the government-regulated markets are not only imposing taxes and facilitating large commissions and fees for the middlemen, but also preventing the retailers to integrate their enterprise directly with the farmers. Finance Minister said that this leaves no incentive for the farmers to upgrade and inhibits private investments in the sector and farmers and consumers both lose out in the process.

On the fiscal front, the Finance Minister Shri Mukherjee said that in addition to growth in States’ own taxes due to improved economic performance, the States have received higher share in Central taxes from the 13th Finance Commission (13th FC). He said that the 13th FC has substantially augmented grants-in-aid to the States. He said that 13th FC has also laid down a roadmap for fiscal consolidation. Expressing hope, the Finance Minister said that this increased availability of resources with the States would enable them to adhere to the roadmap suggested by 13th FC without putting any adverse pressure on their development spending. In that context, the Finance Minister flagged two specific issues. Firstly, he said that in the past few years many States have consistently run cash surpluses. The Finance Minister said that States require some float for smooth expenditure, accumulation of cash beyond a level is inefficient and results in avoidable carrying costs. He said that the difference between their average cost of borrowings and their earnings on cash balances is more than 3 percent. In general, States with large balances need to use their existing cash surpluses before resorting to fresh borrowings, said the Minister. Secondly, he raised the issue of very poor financial health of the State electric utilities, which if not addressed urgently, would impact their fiscal consolidation efforts and the economy of their State. He urged upon them to ensure that subsidies to the electrical distribution utilities for the subsidized sectors like agriculture and rural households are released up front and the DISCOMS are able to realize adequate tariff to bridge and make positive the gap between the Average Revenue Recovered and Average Cost of Supply.

The Finance Minister Shri Pranab Mukherjee further said that an important component of our fiscal efforts is tax reforms in both direct and indirect taxes. He said that while the Direct Tax Code (DTC) is now being rolled-out with specific time lines, implementation of the Goods and Services Tax (GST) requires consensus among the States as well as between the States and the Centre on some outstanding issues. He expressed hope that these will also be worked out to take GST forward in the very near future.

While summing-up his remarks, the Minister said that the issues that he had highlighted have to be tackled collectively without entering into any blame game. The Minister said while the Centre is doing its beat, the States also have to take effective and urgent steps to lower food prices. In the end while asking the participants to give their views on the macroeconomic issues that confront us, Shri Mukherjee said that perhaps, there is also a case for the Empowered Committee of State Finance Minsters to deliberate and contribute to this discussion in the coming times.

The meeting was attended by Chief Ministers who are incharge of Finance portfolios in their respective State/UT which include Goa, Himachal Pradesh, Manipur, Meghalaya and Uttrakhand. Similarly, Deputy Chief Ministers holding charge of Finance in Bihar and Jharkhand also participated in the aforesaid meeting. Beside, Finance Ministers of Arunachal Pradesh, Haryana, Jammu and Kashmir, Kerala, Orissa, Punjab, Tamil Nadu, Tripura, West Bengal, Gujarat and Maharashtra also participated. Ministers from the States of Chhattisgarh, Karnataka, Nagaland and Rajasthan also represented their States and participated in the meeting. Later, they all gave their suggestions for consideration for the Union Budget 2011-12.