Economic Survey: Harping on reforms

The Economic Survey has pointed out that wide-ranging reforms are a must if the country is to realise its ambition of achieving growth rates in excess of 7% p.a. These reforms cover the agricultural, industrial and service sectors of the economy, as well as policy changes to be initiated by the Government. Important areas of reforms include:

Effective taxation of the services sector, widening of income tax base and modernisation of tax administration are critical to enhance revenue and improve the tax/GDP ratio, which has remained below 10% of GDP during the past decade.

Making contractual savings subject to market-related interest rates, increasing user charges on public services such as power, irrigation, transport etc and reducing food & fertiliser subsidies hold the key to expenditure control.

Removal of regulations such as Agriculture Produce Marketing Act, which prohibits farmers from selling directly to buyers for food processing, are essential to reduce the distance of farmers from the market and enable them to get better prices for their produce. More importantly, the Survey calls for a review of the current Minimum Support Price system in light of mounting food stocks.

The Survey recognises that in order to compete in a rapidly changing environment, industry must be aided by appropriate regulatory structure, such as efficient bankruptcy procedures, development of a market for distressed assets and a flexible labour market. Moreover reservation of certain industries for the small-scale sector act as a barrier for the Indian industry. The Survey has also reiterated the need to speed up infrastructure reforms in order to speed up GDP growth.

For this sector the survey calls for enforcement of foreclosure and other procedures for holding up rights of creditors. This recommendation is especially significant, given that gross non-performing assets of the banking sector in India amount to a staggering Rs 547 bn as at end FY01.

Current Economic Review

National Income

Central Statistical Organisation has estimated that the GDP will grow by 5.4% in FY02, spurred by 5.7% growth in agriculture and allied sectors, 3.3% in industry and 6.5% in services. While the agriculture sector did well on the back of spatial distribution of monsoon, performance of the industrial sector was marred by low demand in the economy. However, GDP growth for the current fiscal should be viewed after taking into account the fact that the GDP growth for FY01 was revised downwards twice to 4%.

Inflation

The point-to-point inflation, in terms of Wholesale Price Index (WPI) reached a low of 1.3% by the end of Jan 02, which was the lowest in over two decades. Fall in inflation was mainly on account of lower fuel price inflation, which declined sharply on account of the base effect of previous year's price hikes wearing off.

Government Finances

Fiscal deficit as a proportion of GDP, which was budgeted at 4.7% for FY02, has been revised to 5.1%, compared with 5.5% in FY01. However, given the sluggishness in tax collections in the first three quarters of the current fiscal, D&B feels that the net tax revenues to the Centre will lag budgeted estimates by around Rs 200 bn. With expenditure patterns conforming to budget estimates, and a shortfall of Rs 50 bn in divestment receipts appearing to be a distinct possibility, the fiscal deficit is expected to exceed budgeted figures by around Rs 250 bn.

Balance of Payments

With both merchandise exports and imports stagnating in Apr-Dec 01 as compared to the previous year, and growth of the software sector slowing down, the current account deficit is expected to widen. While acknowledging this, the Economic Survey 2001-02, estimates it to remain within 1% of GDP. D&B estimates that the country will end up with a current account deficit of US$ 2.7 bn in FY02. However, net capital inflows have been good in the current fiscal, resulting in foreign exchange reserves rising to $50 bn by mid Feb 02.

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