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Hectic policy action expected in budget; Pranab Mukherjee to unveil investor-friendly policies
January, 17th 2012

Finance Minister Pranab Mukherjee will attempt to nudge entrepreneurs to invest more by unveiling a raft of investor-friendly policies in the budget to be presented in March, as the government looks to revive the economy without raising fiscal deficit.

These policies include sops for infrastructure and labour-intensive industries and incentives to attract investment in sectors such as urea, a commonly-used fertiliser, and cold chains and supply chains that help maintain the quality of food produce.

"Driving investments will be one of the key areas... focus would be on measures for sectors such as infrastructure and those that benefit agriculture and employment generation," said a government official.

A combination of high interest rates and slow decision-making by the government, widely referred to as policy paralysis, had stalled investments. Gross fixed capital formation, a measure of investments, contracted 0.7% in the second quarter of the current fiscal from a year ago.

Unlike 2008, the government does not have the leeway to step up spending to generate demand and is looking to spur private spending through policy impetus.

"The scope for providing fiscal concessions is very limited... policy measures targeted at specific sectors could be taken up to provide stimulus..." said C Rangarajan, chairman, Prime Minister's Economic Advisory Council.

Mukherjee has conceded that the government is likely to miss the fiscal deficit target of 4.6% of GDP in the current fiscal, increasing pressure to rein in spending.

The budget could announce easing of norms governing foreign investment in infrastructure and set up a dedicated infrastructure debt fund to provide support to public-private projects. It may also attempt to spur urea production by subsidising use of imported natural gas.

The subsidy will be limited to the difference between imported and cheaper domestic gas and is intended to protect the investor and government from large fluctuations in gas prices. 

The cold chain policy in the works may allow the operator of the chain to source farm products from anywhere in the country rather than from the state where it is located. 

"Sentiments are down... They must take measures in the budget and make it a policy statement," said Rajiv Kumar, secretary general, FICCI. 

But some experts said attention should also be paid to fiscal consolidation. "They will have to make pro-investment noises. 

Fiscal deficit is key because that will determine cost of funding...," said Abheek Barua, chief economist,
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