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Economic Survey eyes 8% growth

July 07, 2004 12:07 IST
Last Updated: July 07, 2004 14:19 IST

Outlining the roadmap to achieve 7-8 per cent economic growth on sustained basis, the Economic Survey on Wednesday indicated major initiatives in the Union Budget to overhaul tax system, slash deficit, contain prices and boost agriculture and industry.

Sounding alarm bells on the mounting fiscal deficits of both the Centre and states at 10 per cent of GDP, the Survey (2003-04), tabled in Parliament a day before presentation of Union Budget, said there is a clear need to overhaul the regime of tax exemptions, reduce the number of notifications, simplify procedures and move towards a paper-less and transparent administration anchored on trust.

Apart from fiscal consolidation and sustaining growth momentum, it listed other major challenges as boosting farm growth, expanding industry by 10 per cent and keeping inflation rate to about 5 per cent.

Warning that hardening global prices of oil and non-oil commodities could affect monetary conditions, it warned with fiscal deficit and signs of credit pick-up the possibility of interest rates moving northwards could not be ruled out.

To achieve higher 10 per cent industrial growth, the Survey said five constraints that needed to be tackled are:

  • Reservation for small scale industries,
  • High customs tariff,
  • Rigidity in labour laws,
  • Reaping economies of scale,
  • Friction in creation and closure of firms and distortions in indirect tax structure.

The burgeoning foreign exchange reserves at $119 billion have provided flexibility to hasten trade reforms, it said stressing on liberalising foreign direct investment regime to make it an engine of growth as in China.

On customs duty, whose peak rates were reduced to 20 per cent in the interim budget, the Survey said they should be gradually reduced to align them with that of ASEAN countries.

Apart from flexible labour laws, the Survey said it was essential to adhere to the deadline of April one, 2005 for transiting to state-level Value Added Tax system for rapid industrial growth.

Introduction of Value-Added Tax was essential as the current regime of domestic trade taxes at the state level was characterized by distortions and inefficiencies arising from cascading and multiple rates, it said.

Implementation of VAT and recommendations of the 12th Finance Commission would be critical determinants of fiscal improvement at the state level, it said.

To achieve the specified milestones in fiscal adjustment, there was a need for sustaining the reforms in tax and expenditure administration.

"Any misguided scepticism about the resolve behind the declared goals of fiscal consolidation should be scotched by bold actions," it said adding the reward of consolidation will be creation of more fiscal space for social and physical infrastructure and macro-economic stability.

Although economic growth has improved from 2.9 per cent in the 70s' to 5.8 per cent in the 90s', the Survey said to achieve 8 per cent target in the tenth plan, there has to be acceleration in savings and investment rate to 32.3 per cent and 24.4 per cent, respectively, in 2006-07.

Elaborating on fiscal consolidation, it said it is important to establish rigorous penal and enforcement mechanism that takes care of those who violate trust imposed as is the practice in countries with low rates, simple tax laws and procedures.

Sustainable growth hinges on availability of efficient infrastructure, it said adding a strong enabling environment had to be created for more private investment in the sector.

Noting that surging global oil prices were unlikely to stifle the growth recovery, the Survey, however, cautioned if it persisted, it would not only threaten to dampen some of the momentum of the process but also exert upward pressure on inflation.

Though foodgrains stocks were comfortable, the full potential of agriculture as a profitable activity must be realised at the earliest to give a fillip to overall growth of the economy.

Some of the measures for boosting agricultural growth required the development of a medium-term framework, it said, adding that better access to timely institutional credit for more farmers was of utmost importance.

While acceleration of agriculture growth to 4-4.5 per cent was crucial, it was important that agro industries are developed to absorb excess farm labour.

Stressing that annual industrial growth has been in a disappointing single digit since 1995-96, the Survey said one of the challenges is devising strategies for sustained growth of 10 per cent.

The experience suggests that with appropriate scale, investment and technology, rapid industrial growth is indeed possible.

On the termination of quota system in textiles by January 1, 2005, the Survey said it offered great potential for the growth of the industry, which is largest in terms of employment.

Voicing concern over a slowdown in FDI, it said suitable liberalisation of both the FDI and FII regimes, including procedural issues, needed to be considered for enhancing foreign investment flows as considerable buoyancy of China's industrial growth has been due to large FDI flows.

The strong interest displayed by FIIs in the Indian market in 2003-04 is encouraging and is likely to continue if there are no exogenous factors.

There is likely to be a large and growing demand for Indian securities by FIIs. This needs to be harnessed, it said.

Among the other factors that could help in boosting industry are removal of the remaining items from the list reserved for small-scale industry, adequate supply of credit services, technology assistance and infrastructure and low  transaction costs, it said.

Asserting that the fiscal situation of state governments has been a cause of concern, it said the main factors that had contributed to fiscal deterioration were relatively higher level of expenditure on salaries, unfunded pensions, mounting interest payments, improperly targeted subsidies and deterioration in the tax-GDP ratio.

A prudent fiscal policy stance was a natural concomitant to the Fiscal Responsibility and Budget Management Act, it said, adding that a few state governments have also put in place the fiscal responsibility legislation, strengthening the efforts made by the Centre in fiscal consolidation.

On the capital markets, the Survey said India's equity market was now being increasingly recognised as a success story on the world scale.

The focus of development in the commodity futures markets has shifted to the three multi-commodity exchanges.

These efforts will need to be followed through with improvements in clearing and settlement, and strengthening the regulatory framework.

On the reform of power sector and proper development of public utilities, the Survey underlined the need for enforcing user charges and proper regulation to inject competition in the infrastructure sector.

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