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Rev up reforms

INDIA WILL be able to sustain and accelerate economic growth from the current 8 per cent level to a sustained 10 per cent per annum only if massive investments in physical infrastructure are coupled with sweeping reforms in critical areas like energy, taxes and labour laws, the government has said in its pre-budget report on the economy.

india Updated: Feb 28, 2006 01:38 IST

For 10 p.c. growth, drastic steps needed

INDIA WILL be able to sustain and accelerate economic growth from the current 8 per cent level to a sustained 10 per cent per annum only if massive investments in physical infrastructure are coupled with sweeping reforms in critical areas like energy, taxes and labour laws, the government has said in its pre-budget report on the economy.

However, the Economic Survey for 2005-06, tabled by Finance Minister P. Chidambaram in the Lok Sabha on Monday, has failed to delineate how exactly this can be brought about.

The survey paints a rosy picture of the economy's state of health. GDP growth, at 8.1 per cent, has exceeded expectations, fuelled by a 9 per cent-plus growth in manufacturing, strong growth in services and a turnaround in agriculture.

Inflation is pegged at a modest 5 per cent for the year.

However, there are major concerns over energy security, the inadequate passing through of rising energy costs and the consequent impact on inflation, and the enormous investments required in the creation of infrastructure in power, ports, airports and roads. Acknowledging that growth is "inextricably intertwined" with infrastructure, the survey estimates current investment needs in the area at Rs 176,000 crore, along with $150 billion of foreign direct investment.

But given the parlous state of its finances, it optimistically hopes that a bulk of this would come through public-private partnership.

Shortage of power, estimated at an average 8 per cent and 12 per cent at peak load, is resulting in an opportunity cost of Rs 300,000 crore. But the requisite measures outlined in the survey — including the creation of an overall energy regulator, sweeping legal reforms and revitalisation of the mining sector, especially coal — are also likely to remain on the wish list. Other key priorities identified include tax reforms, opening up of labour markets (especially in special economic zones), better expenditure management and a sustained push for adding more jobs.

Of the four, Chidambaram is bound to focus on tax reforms in his budget on Tuesday. While the survey has said industry needs to be “unburdened from high taxes” to make it globally competitive, it has hinted that tax exemptions enjoyed by some industrial sectors and groups may be targeted as they provide “perverse incentives”.

Further, the survey does not support expenditure without adhering to reduction in fiscal and revenue deficits as prescribed in Fiscal Responsibility and Budget Management Act. But a question mark hangs over achievability, with government’s consumption expenditure growing at a faster clip than the private sector’s, a first, and yet another pay commission in the offing.

While refraining from increasing retail prices of petrol and diesel in the budget, the finance minister may resort to revamping the customs and excise impost that constitute about 40 per cent of the cost. He may also prevail upon state chief ministers to reduce the sales tax on petro-products that range between 12 and 38 per cent. Chidambaram may, however, spare domestic LPG from any possible price hike.