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Kala S. Sridhar

WITH the deadline for conformity with the WTO requirements fast approaching, it is time to assess the extent to which the latest policies have facilitated the sectors in which India has comparative advantage — such as in information technology (IT), the traditional items of gems, jewellery and textiles, and healthcare/legal services — in adhering to them.

The 2003 Budget ignored the Kelkar Committee recommendation of an across-the-board removal of exemptions for all industries, to simplify the tax structure and improve tax administration and compliance. In the IT sector, for instance, the Budget handed out 100 per cent tax exemption for software companies, in the process making things more complex.

It is, however, not clear what effect VAT will have on the IT segment. The reduction in the Customs duty on capital goods used in hardware is in conformity with WTO requirements. And, the duty on optical fibre cables, used extensively by the industry for networking and providing the required bandwidth, has also been reduced.

The impact of these measures promises to be positive for the IT sector. But the continued strong growth in software exports through such import liberalisation could lead to an appreciation of the rupee, affecting, thereby, competitiveness on this front.

In the short run, while the net margins for larger IT firms increase the budgetary deficit of the Government would also go up. Had the Kelkar panel recommendations been accepted, it may have been possible to use the resulting budgetary savings for development of the old economy — the road infrastructure, for instance.

India recently became the ninth largest spender on telecom infrastructure, which is essential for improving IT-enabled services. Spending on telecom is the sum of: a) budgetary allocation; b) what consumers pay for telecom services; and c) what telecom companies (PSUs/private operators) spend on telecom-related components.

Thus, increasing spending on any infrastructure sector implies a direct relationship between the services provided and user charge. This simple relationship shows that spending on roads and power is restricted, insofar as consumers' willingness to pay is limited and where cross-subsidisation exists.

In the power sector, for instance, the average tariff charged in 1996-97 per kWh of power to the domestic sector (which accounted for 16 per cent of the total power sales) was Re 0.90, to farmers (33 per cent of the sales) it was Re 0.21 and to industrial and commercial consumers (51 per cent), Rs 2.50.

Despite this cross-subsidisation, the average realisation from all consumers works out to be only Rs 1.49, which is 80 per cent of the average cost of generation and distribution.

Thus, as in telecom, the consumers of other infrastructure facilities, such as roads, need to pay more for the services. This would increase, apart from the budgetary allocations, the spending in these sectors.

Further, there is a need to focus on areas where the country has comparative advantage. The reservation of production of items such as textiles and jewellery for the small-scale sector should be removed. Though the latest Budget de-reserved 75 items (covering, among others, leather, paper and chemicals) from the SSI sector, more needs to be done on this front.

And as regards healthcare/legal services, just as we would like other countries to open their doors for our IT professionals, foreign law firms should be allowed to practise in the country.

Given the structural constraints, India has been taking a `gradualist' approach in undertaking reforms. The reform efforts on the small-sector de-reservation, infrastructure (excluding telecom), disinvestment, labour and land reform fronts have at best been incremental — a few steps forward and a few back every year, so as to satisfy all the interest groups.

The need, therefore, is to globalise and make the best use therefrom, to usher in equality of opportunity, though not necessarily equality of outcome.

(The author is on the faculty of IIM-Lucknow.)

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