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Survey warns of high fiscal deficit, prescribes more reforms

Projecting a low 5.4 per cent growth this year, pre-Budget Economic Survey on Tuesday warned high growth would be difficult without reducing mounting fiscal deficit, agriculture and tax reforms including a relook at exemptions, cut in small savings rates and subsidies, besides big ticket privatisation.

Indicating overshooting of the fiscal deficit to 5.1 per cent of GDP this year, the survey singled out fiscal stabilisation as the most difficult of the problems facing economic management. The problem of fiscal deficit should be addressed both on revenue and expenditure sides.

The survey, which lays out the reform agenda for the Budget, said the problem of high-administered real interest rates remained. Making contractual savings subject to market related interest rates are essential for containing the interest payments of the government, as also for reducing interest rates for the economy.

Recovery in industrial growth can inject some buoyancy in excise receipts as can the removal of tax exemptions that continue and curbing of leakage resulting from exemptions extended to the small-scale sector.

"Subsidies remain a continuing problem in expenditure structure of the central government," the survey said adding with reducing rates of poverty, justifiable food subsidy should also reduce proportionately.

Calling for wholesale modernisation of the tax administration, the survey said extending service tax to more areas assumes importance to improve revenue in the face of growing tertiary sector. But its extention to all sectors could wait till value added tax introduction in April one, 2003.

Noting that substantial portion of subsidy went into inefficient high cost production, the survey wanted accelerated implementation of fertiliser price reforms to reduce subsidy to sustainable levels and making it more transparent and better targetted.

Voicing concern over the high fiscal deficit of both the Centre and states, the survey said today's fiscal deficit results is tomorrow's revenue deficit. So equal attention has to be paid to containing both.

Public borrowings for public investment is indeed justified and should indeed be undertaken but what is necessary is to ensure that investment is done effectively and this can be done if appropriate user charges are levied on public services.

Uneconomic and low user charges in sectors like power, road, transport and irrigation impair state Budgets and this impacted on the central Budget as well through non-payment to central government utilities.

Similarly unbalanced tariff in central services like Railways lead to financial losses which then had to be compensated for by the Central Budget.

Stressing that high GDP growth in excess of 7 per cent was not possible without accelerating agriculture growth, the Survey said this could be possible only through paradigm shift in policy over the last 30 years by having a relook at minimum support price for various commodities to enable farmers take up diversification of crops and removal of restrictions.

The falling public investment in agriculture has been a cause for concern because it is crucial for the development of infrastructure like irrigation, electricity, farm research, roads, markets and communications.

Investment in agriculture declined from 1.6 per cent in 1993-94 to 1.3 per cent in 1998-99 and this calls for review of the policies which have led to diversion of scarce resources in the form of subsidies for fertilisers, rural electricity, irrigation, credit and other agriculture inputs, away from the creation of productive assets.

Removal of various regulations and restrictions in agriculture would help in promoting higher production of marketable agricultural commodities and in food processing which in turn will induce much needed acceleration in employment growth in rural areas and small towns.

Turning to the industrial sector, the survey called for the need to shift the structure of investment in industry from capital intensive to labour intensive to benefit from the comparative advantage of cheap labour.

It was expected that such a shift would provide for greater profitability and earnings growth, more export oriented production and greater employment opportunities in industry.

But this called for far reaching economic reforms to make Indian industry compete in the changing international environment through the provision of an economic regulatory structure, which allows for restructuring on a continuing basis, the survey said.

This requires efficient bankruptcy procedures, development of a market for distressed asset, provision for easy transfer of assets from one owner to another and a flexible labour market, the survey said.

The government has recognised the need for such flexibility, the survey said adding the bill to establish National Company Law Tribunal to address issues of sickness and bankruptcy has been introduced in Parliament along with that for abolition of Sick Industry Act and the resolution of Board for Industrial and Financial Reconstruction.

As these bills get enacted, the process of industrial restructuring should become easier and faster, the survey said, adding, similarly the government has initiated the process for amending the labour law to provide for greater flexibility in employing labour and for outsourcing of services so that labour use becomes more flexible and efficient.

Progress in the implementation of these initiatives is essential to enable Indian industry to restructure itself to cope with the more competitive domestic and international environment and to induce employment generating industrialisation.

The key rigidity inhibiting Indian industry from investing in labour using activities that are export oriented is a continuation of the small-scale industrial reservation.

With the removal of quantitative restriction on almost all imports, this rigidity has become even more anomalous.

Available data suggest that organised sector industrial employment in India is less than a fifth of that of China, the survey said adding the rigidities in labour legislation and small-scale industry reservations have contributed to this huge imbalance.

The survey said time was ripe for carrying forward financial sector reforms so that real economy could benefit from modernised financial sector that exhibits high productivity level greater diversification and provides a greater variety of investment instruments for serving the emerging needs of the economy.

Referring to the persistent high interest rates, the survey said that studies suggest the share of interest in cost in Indian industry was perhaps the highest in comparable developing countries.

With the reduction in both inflation and nominal interest rates, these legacy interest rates have now resulted in significant debt overhand for these industries.

Pro-active restructuring policy would need to address the issue of corporate debt restructuring, the survey said.

In the face of increased competition and uncertainty in the international environment, there was a greater need for a stable and predictable tax policies.

In the areas of customs, the government has already announced the reduction of maximum custom duties from the current level of 35 per cent to 20 per cent in three years.


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