Wanted: Bold Initiatives

India's Economic Survey, an annual official document that reviews the country's economic health, has prescribed bold initiatives, including hastening of tax and labour reforms and measures to push infrastructure development.
The Economic Survey, released a day ahead of the Budget for fiscal 2006-07 (April-March) presented on February 28, predicted moderate inflation despite volatile global oil prices.
Though the economy was on a roll with 8.1 per cent growth projected this year 2005-06, ending March 31, the Survey, however, warned that there was risk of hardening interest rates, higher inflation and fiscal deficit in the face of a global oil crisis.
Without tackling the major problem of power, it would be difficult to move on to high 8-10 per cent growth, the report card of the government said.
The 2005-06 Survey was tabled in Parliament by Finance Minister P Chidambaram, who promised to cut deficits and deal with the problem of unprecedented oil prices and upward pressure on interest rate.
The document advocated unburdening the industry from high level of taxes and distortive exemptions that provided perverse incentives. It also favoured levying user charges and cutting unwanted subsidies.
Welcoming the hard reforms prescribed by the Survey, trade and industry said they would not get the requisite shot in the arm without implementing the pragmatic suggestion of “debottlenecking” the infrastructure and speeding up tax reforms.
Simplification and digitisation of tax administration remains a pre-requisite for a transparent and hassle free tax system, the Survey said.
Warning that "the danger of an unprecedented price increase was ever-present," the Survey said given the sufficient foreign exchange reserves and government's commitment to further trade and tariff reforms and strict fiscal prudence and monetary discipline will see the price level remaining within tolerable limits in the medium-term.



The Survey also said the worry about growing imports and burgeoning current account deficit was somewhat misplaced as it is unlikely to pose a balance of payment problem, because of high capital and other essential inputs that would only add to export momentum.
As regards the labour laws, the Survey was highly critical, saying, "Indian labour laws are highly protective," and suggested drastic reforms taking a cue from the Chinese.
Appreciative of the pick up in agriculture, with the sector likely to end up with 2.3 percent growth, the Survey, however, made a strong case for pushing up reforms in the sector and improving flow of credit.
The Survey laid special emphasis for speeding up agriculture and rural development, particularly in areas like horticulture, floriculture, organic farming, genetic engineering, food processing, branding and packaging and futures trading.
It also listed some of the issue is that needed to be tackled in agriculture like low yield, volatility in production and wide disparities in productivity. The Survey favoured a shift from the existing minimum support price (MSP) and public procurement system and developing alternative product markets.
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 liberalization 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.
Laying emphasis on infrastructure development, the Survey said Rs 172,000 crore (Rs 1,720 billion) was required for highways by 2012, Rs 40,000 crore (Rs 400 billion) for airports by 2010, Rs 50,000 crore (Rs 500 billion) 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.
The management of 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 on subsidies in domestic LPG and PDS Kerosene.
With considerable investment in the pipeline reflecting the confidence of domestic and foreign investors in the economy, the securities market, though well-equipped, needed further improvements, it suggested. 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.



Highlights:

Economic growth projected at 8.1 per cent in 2005-06.
• Agriculture growth at 2.3 per cent.
• Foodgrains output up by 5 million tonnes to 209.
• Inflation rate projected at 5% in current fiscal.
• In medium-term, inflation likely to fall.
• Interest rates may harden.
• Savings rate up at 29.1 per cent of GDP.
• Investment rate up at 31 per cent of GDP.
• Industrial growth at 7.8 per cent (April-December).
• Fiscal and revenue deficit targets to be met.
• Tele-density increases to 11.32 per cent.
• Current account deficit surfaces after a gap of 3 years.
• Trade deficit increases.
• Bold policy reforms in oil sector required.
• Policy required for speedy development of infrastructure.
• Indian industry needs to be unburdened from high taxes.
• Forex reserve down by $2 billion to $139.2 billion (till Jan'06).