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Economic Survey pegs GDP growth at 8.1 per cent

Written by: Staff

New Delhi, Feb 27: The Economic Survey 2005-06 tabled today (Feb 27, 2006) in Parliament projects a growth rate of 8.1 per cent in 2005-06 and calls for deepening of the Reform process in regard to taxation, industrial and labour policies and stresses the need for fiscal consolidation and 'rapid and bold policy response' in the hydrocarbon sector in view of the threat of lingering oil crisis.

The annual point to point inflation rate is likely to remain around five per cent at the end of March, 2006 though the Survey highlights the upward pressure on the interest rates arising from continuing volatility in energy prices.

Discounting uncertainty associated with high and volatile international petroleum prices, the survey said the near and medium-term inflation risks in the Indian economy were manageable.

"The danger of an unprecedented price increase is ever-present".

However, given sufficient foreign exchange reserves and the goverment's commitment to further trade and tariff reforms,strict fiscal prudence, monetary discipline and orderly movement of the exchange rate of rupee, the annual inflation rate in terms of both wholesale and consumer price indices is likely to witness declining trend in the medium term and remain within tolerable limits''.

The survey was tabled in both Houses of Parliament by Finance Minister P Chidambaram.

The survey makes out a strong case for providing continued thrust to improving the infrastructure and the agricultral sectors to put the latter on a sustained growth path of four per cent per annum up from the expected level of 2.3 per cent in 2005-06.

Agriculture Sector

Prospects of agriculture production in 2005-06 are reasonably bright due to near normal Monsoon. It is expected that the foodgrains production may increase to 209 million tonnes in 2005-06.

A distinct bias in agriculture price support policy in favour of foodgrains in the past has distorted cropping pattern and input usage and would require corrections. It says market for farm output continues to depend heavily on expensive government procurement and distribution system. A shift from the current Minimum Support Price and Public Procurement System and developing alternative product market was essential for crop diversification and broadbased agriculture development.

Painting a buoyant picture of the economy, the survey says, "The odds are loaded heavily in favour of a continuation of the growth momentum observed in the last three years. A virtuous cycle of growth and savings, that appears to be already underway, is likely to continue for some years to come". "The growth trend for the last three years appears to indicate beginning of a new phase of cyclical upswing from 2003-04", it says.

The survey says as the large gap between investment rate in India and that in the East Asian countries during their take off gets bridged, the Indian economy should start posting growth rates observed then in the East Asian countries. Stating that the reforms of the tax system still remains an unfinished task, the Survey makes out a case for unburdening the Indian industry from the high level of taxes and distorted exemptions that provide 'perverse' incentives to make it competitive globally.

Throwing a broad hint at continuation of the lower tax regime,the document states that policy of the moderate rates of taxation resulting in higher revenues and better compliance has paid dividends.

The downside risks to the robust growth include hardening of interest rates a rising from inflation uncertainty together with unresolved global macro-economic imbalances. "It casts its shadow on the interest rate scenario. A continued firming up of interest rates beyond a point poses the risk of dampening the domestic investment boom". It underlines the fact that the infrastructure deficit continues to 'haunt India'. The surveys says that the policies and institutions need to be geared to meet the specific requirement of the sector.

A well-defined regulatory architecture has to be in place to increase the comfort level of different players in the market.

Issues of span of control, and conflicting domains need to be delineated and fleshed out . For example, an energy regulator, cutting across line ministries needs to be in harness to tap the synergy of different sectors''.

The Survey says fiscal consolidation would resume in the Budget for 2006-07 and the eventual targets of fiscal and revenue deficit under the FRBM Act would be met by the terminal year 2009. It is hopeful that the fiscal and revenue deficit targets for the concluding year 2005-06 would also be met.

Foreign Direct Investment

The government indicates further liberalisation of the coal sector including allowing an associated coal-mining company (apart from Coal India Ltd ) engaged in captive mining to sell excess coal to any other eligible end-user; allocating coal blocks for captive mining through price-based auctions and liberalisation of FDI restrictions in joint ventures in captive mines.

India has an estimated potential to absorb 150 billion dollar FDI in the next five years in the infrastracture sector alone. The policy outlines by the survey favours privatisation of designated services to improve the productivity.

Expressing dismay at the slow process of power reforms, the Survey says better management of coal and gas supplies would improve the situation.

The Survey cautions the Central and State Governments against burgeoning fiscal and revenue deficits in the event of implementation of the Sixth Pay Commission.

The Survey says the process of withdrawal of grandfathering of tax exemptions was being speeded up and higher revenues have accrued even with the unchanged or lower rates. It stresses the need for widening the tax-payers' base, tax-payers' facilitation, reliance on voluntary compliance and effective and fast penal mechanism. The process of simplication and digitisation of tax administration, which has been initiated, remains the pre-requisite for a transparent and hassle-free tax system.

Oil sector

Hinting at greater parity between the global and domestic crude oil prices, the Survey refers to the Rangarajan Committee Report and observes that with the medium term prospects of crude prices remaining high the continuation of the incomplete pass-throughs is not sustainable without serious consequences to the financial health of oil companies and the exchequer.

"Besides, the perverse incentives for fuel switching arising from differential tax rates need to be addressed. The management of lingering oil crisis requires rapid and bold policy responses with a firm resolve".

Employment Scheme

The Survey says that the entire gamut of expenditure based on anti-poverty initiatives needs to be revisited in view of the enactment of the National Rural Employment Scheme (NRGS) serving as the broad safety net.

It says that labour reforms to accelerate investment, particulary in industry and export-oriented sectors remains an unfinished important agenda."The importance of reforming the labour laws to enhance productivity, competitiveness and employment and general economic reforms hardly needs emphasis".

Hinting at further deregulation of the manufacturing sector, the Survey says sustained efforts to remove bottlenecks hindering the productivity of this sector would boost its performance.

It makes out a case for dereserving the small scale sector, and facilitating provision of adequate bank credit and of clusters to make it a dynamic sector of economy.

It stresses the need for pruning unproductive schemes and suggests that all planned schemes should be evaluated once in five years. There is much scope to increase productivity of public expenditure through convergence of schemes with similar objectives, cutting down time and cost over-runs, collecting appropriate user charges, realising value for money in subsidies and ensuring better outcomes.

With the dissavings of the public sector going down through the fiscal adjustment underway, in both Centre and states, the savings and investment rates have been climbing up promising richer growth dividends in the medium term. "The policies promoting this virtuous and mutually reinforcing process need to continue", the document states.


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