Bold reform measures for services sector likely

Finance Minister Pranab Mukherjee may announce bold reform initiatives in the services sector to boost growth prospects in the Budget for 2011-12. Announcement of intentions to open some segments of the insurance sector, like health insurance, disinvestment in a few identified service sector PSUs, and steps to address multiple levies and duties in the telecom sector, could be part of this initiative.

These measures are among the steps suggested in a working paper on reform initiatives required in the services sector, supported by the finance ministry. This process has been started by Chief Economic Advisor Kaushik Basu. The objective of this initiative is to improve economic analysis and promote evidence-based policy formulation.

A senior finance ministry official said the study on services would certainly be part of the Budget discussions. He added the suggestions were likely to provide a basis for policy formulations in the sector.

The paper has outlined many reforms that need to be initiated and implemented in the short term, including opening of health insurance and disinvestmest of select PSUs; some policies like opening retail trade, opening insurance, liberalising air transport services, FDI in railways, disinvestment of PSUs involving labour issues, etc, may need more time. Nevertheless, it is worth making efforts to push these reforms as well, it has added.

Mukherjee may decide to outline the government agenda on these measures in the forthcoming Budget.

Raising foreign direct investment (FDI) cap in the insurance sector from 26 per cent has been on the government’s agenda for long but could not be implemented for various reasons, including strong political opposition.

The paper has suggested, given the practical difficulty in raising FDI cap in the insurance sector as a whole, “at least some segments of the insurance sector can be opened up further — one such segment is health insurance and FDI cap at least in health insurance can be raised in India on a priority basis, as it will also help the export of super-speciality hospital services”.

Further, it has recommended that the 10-year disinvestment clause in the insurance sector and FDI restrictions in the reinsurance sector could be removed and foreign reinsurance companies should be allowed to set up representative offices and function in India through a network of branches and divisions.

The companies listed as candidates for disinvestment in the short term are SCI, EIL, RITES, EPIL, ITPO, STC, MMTC, NBCC and NFDC.

Other policy measures suggested for implementation in the short term include:

# Liberalising FDI in rural banking with the help of mobile technology,

# Liberalising FDI in the animation sector,

# Relaxing the minimum-area norm in the construction sector,

# Raising foreign investment cap for uplinking news and current affairs TV channels from 26 per cent to 49 per cent,

# Making available FDI policy on the website in a user-friendly way,

# Rationalising taxes in the shipping sector,

# Resolving the definitional issues under tonnage tax for shipping,

# Addressing the tax credit issue in case of films.

# Addressing the issue of royalty/turnover tax by airport authorities on service centres, and

# Addressing the inverted duty issue in the printing sector.

 

THE REFORM PRESCRIPTION

SHORT-TERM (LIKELY IN BUDGET)

# Opening up of health insurance
# Disinvestment in select PSUs
# Address multiple levies and duties in telecom sector

LONG-TERM (COULD OUTLINE BUDGET ROADMAP)

# Opening retail trade
# Liberalising insurance sector
# FDI in railways
# Disinvestment in PSUs involving labour issues