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Tuesday, December 15, 2009

Infrastructure, taxes top India reform priorities

The government will use its political clout to push tax reforms that would boost revenues but could put other policies, such as insurance and pension changes, on the backburner for several months.

Investors had hoped the easy re-election of the centre-left Congress party in May would clear the way for market reforms. But managing the impact of the global financial crisis and a failed monsoon have diverted much of the government's attention.

Now, the way is clearer. But the government is making signals it will give priority to building roads and power plants and pushing through a goods and services tax (GST) to broaden the tax base and simplify a notoriously inefficient revenue structure.

India faces a fiscal deficit for the current financial year of 6.8 percent of GDP, its highest level in 16 years, which it is funding through record borrowing of about $97 billion.

Moves to open up pensions and insurance to foreign investors are not vote winners and may take longer than some hoped.

Despite having a large majority in parliament, Prime Minister Manmohan Singh must still juggle the interests of his coalition partners, many of whom are regional parties which give priority to their own local interests rather than national policies.

The aim of reforms is more efficient deployment of capital in a country of more than 1.2 billion where the savings rate is nearly 40 percent of GDP. An underdeveloped financial system means relatively little is funnelled into capital markets to fund the big-ticket infrastructure projects India desperately needs.

"There are so many things of much greater priority, most of all getting investment in infrastructure," a government official involved in setting policy told

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