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Growth at 8.1%, Survey urges hard reform

The pre-budget Economic Survey said the industry needed to be unburdened from high level of taxes. Highlights

india Updated: Nov 27, 2006 19:37 IST

Cautioning that the economy's rosy outlook was not devoid of risks of inflation, hardening interest rate and fiscal deficit, the pre-budget Economic Survey on Monday prescribed hastening tax and labour reforms and measures to remove infrastructure bottlenecks to sustain high growth.

The 2005-06 Survey tabled in Parliament said the Indian industry needed to be unburdened from high level of taxes and distortive exemptions that provided perverse incentives. It favoured levying user charges and cutting unwanted subsidies.

Simplification and digitisation of tax administration remains a pre-requisite for a transparent and hassle free tax system, the report card of the government, said.

The Survey projected economic growth of 8.1 per cent during 2005-06 with new industrial resurgence, pick up in investment and modest inflation.

Identifying power shortage as the single most impediment to growth, the Survey said appropriate policy initiatives constituted the first and foremost challenge for speedy infrastructure development.

It favoured liberalisation of FDI regime for captive mining as slowdown in mining sector was of concern, especially coal, which accounted for 60 per cent of the country's primary energy demand and 70 per cent of power generation.

The management of lingering oil prices required rapid and bold policy responses, the Survey said regretting that the movement towards market determined prices in the hydrocarbon sector has floundered pending resolution of subsidies in domestic LPG and PDS Kerosene.

Deepening the reform process

Noting that fiscal policy was a critical component for high 8-10 per cent growth with macro economic stability, the Survey said high deficits, unproductive expenditure and tax distortions have constrained the economy from realising its full growth potential.

Rejecting quick fix solution for propping up growth, it said there was much scope for better productivity in expenditure and greater growth through deepening the reform process for harnessing higher savings and investments.

High and volatile global petroleum prices put an uncertainty in inflation outlook casting its shadow on the interest rate scenario, which may pose a risk of dampening the domestic investment boom.

The fiscal risk, both at the Centre and state level, has led to expenditure compression of the wrong kind, it said, adding that the government should revert to meeting the FRBM target of reducing fiscal and revenue deficit by 0.3 and 0.5 per cent of GDP annually.

While the worry about rapidly growing imports and burgeoning trade deficit appears to be misplaced, the Survey said higher import of capital and other essential inputs, in fact, would add to the export momentum in the future.

It also wanted the government to exercise caution while constituting sixth pay commission to avoid deterioration of state and central finances as witnessed during the implementation of previous pay commissions.

Emphasis on infrastructure development

Laying emphasis on infrastructure development, the Survey said Rs 1,72,000 crore was required for highways by 2012, Rs 40,000 crore for airports by 2010, Rs 50,000 crore for ports by 2012.

A substantial share of this investment is expected to come from the private sector and India has a potential to absorb 150 billion dollar of FDI in next five years.

To speed up infrastructure development, a well-defined regulatory mechanism has to be put in place to increase the comfort level of different players in the market.

Issues of span of control and conflicting domains need to be delineated and flushed out, it said suggesting a single energy regulator to tap the synergy of different sectors and ministries.

Speeding up agriculture and rural development

The Survey laid special emphasis for speeding up agriculture and rural development, particularly in areas like horticulture, floriculture, organic farming, genetinc engineering, food processing, branding and packaging and futures trading.

It also listed some of the issue that needed to be tackled in agriculture like low yield, volatility in production and wide disparities in productivity.

It also favoured a shift from the existing Minimum Support Price (MSP) and Public Procurement System and developing alternative product markets.

Need for labour reforms

To enhance employment and investment in industry and export oriented sector, the Survey said labour reforms needed to be carried forward.

The Survey stressed on a paradigm shift to encourage banks to look at credit to small and medium enterprises and agriculture as an opportunity for profit rather than a social obligation under directed subsidised credit.

Efficient management of social sector programmes

It suggested efficient management and delivery of social sector programmes through adequate capacity building, decentralisation of implementation and transparency in delivery and accountability of agencies involved.

It said emphasis should be laid on quality of outcome of various social sector programme including eductaion and health rather than quantity of coverage.

Pension reforms

Concerned over the rapid growth of public pension liability, the Survey wanted pension reforms, including the passage of Pension Fund Regulatory Development Authority Bill, to be speeded up.

With considerable investment in the pipeline reflecting the confidence of doemstic and foreign investors in the economy, the securities market, though well-equipped, needed further improvements.

The improvements should be in areas of disclosures, trading technologies and policies on derivatives, removing the problem of multiple bids, strengthening the investigation and surveillance and improving the functioning of bond markets.

First Published: Feb 27, 2006 12:36 IST