Growth at 9.2 pc; Survey calls for tax reforms

New Delhi, Feb 27: Pegging the growth rate at 9.2 per cent in 2006-07, the Economic Survey calls for a consensus approach on reforms, steps to control inflation and spur growth, but cautions on reckless moves towards fuller capital account convertibility.

The Economic Survey 2006-07 tabled by Finance Minister P Chidambaram in Parliament today stresses the primacy of growth over other policy parameters and problems, including inflation, and makes out a case for renewed thrust towards social sectors.

The heat of the political parties on the UPA government, particularly the Left parties, finds an echo in the survey.

It suggests appropriate sequencing of reforms to sustain their popular support and reconciling the interests of various constituencies.

Commenting on the recent controversy over Special Economic Zones, the survey says many of the apprehensions need to be addressed through appropriate policies and safeguards.

The survey lists bringing down prices as the top priority of the government and says improved supply side management holds the key to this.

With a view to sustaining the dynamism of export growth, the Survey recommends deepening of domestic reforms like eliminating outdated and inflexible labour laws, phasing out reservations for the small scale sector and high transaction costs as well as clearing the bottlenecks in the way of infrastructure growth.

The survey highlights the need for further reforms of taxation to sustain the growth momentum in revenues, particularly improving the efficiency of the tax administration.

In this regard, it suggests building up of a comprehensive database of tax payers, taxes paid, income and transactions in the asset market and linking it up effectively with scrutiny and assessment processes.

Saying that the Achilles heel in the success story of fiscal prudence is the poor performance on the expenditure front, the survey calls for revisiting the multiplicity of poverty alleviation schemes.

The survey paints a robust and buyant picture of the economy and projects GDP growth at 9.2 per cent in 2006-07, building on 9 per cent growth in 2005-06. There has been a sharp rise in the rate of investment, now the main driver of growth -- besides high savings rate, increase in FDI growing by a high 98.4 per cent in the first half of 2006, buoyancy in exports and imports and bullish capital markets.

It exudes confidence at the sustainability of the growth process, and says that both industrial and services growth could be maintained at double digit in the years to come.

The survey, however, admits that in the current year pressure on inflation would persist because of a mismatch in supply and demand of some primary articles and firm international prices.

However, it warns that growth should not be sacrified at the altar of bring down the flames of inflation.

A better exercise in expenditure management is improved targeting of subsidies. In this regard, the survey calls for an alternative mechanism for subsidy delivery for income transfers to the "truly needy." Stating that the external economic environment was likely to remain supportive, the survey has a word of caution on further steps towards capital account convertibility.

''The movement towards fuller capital account convertibility may also require a sound system of monitoring of the external sector variables and hence a modern real time system of data management is an imperative, lest the ability of the country to diagnose the symptoms of crisis in time and take corrective action stands.'' On overheating, the survey suggests a two-pronged approach to overcome it: Rapid growth in capacity addition and managing merchandise imports within safe limits.

The survey says the former can be managed through investments to avert the problem of capacity constraints. The other indicator of over-heating, namely merchandise import growth, also ''appears to be within reasonable limits.'' ''Concerns have been expressed about whether the country is growing beyond its growth potential thereby straining its labour force and capital stock and hence engendering inflationary instabilities. In India, with unemployment both open and disguised, concerns over over-heating are connected more with capacity utilisation and skill shortages,'' the survey says.

''Vigorous growth with strong macro-economic fundamentals has characterised developments in the Indian economy in 2006-07 so far. However, there are some genuine concerns on the inflation front. Growth of 9 per cent and 9.2 per cent in 2005-06 and 2006-07 respectively, by most accounts, surpassed expectations.'' With a policy framework in place, the survey expects much larger investments in the infrastructure sector.

Forecasting bright prospects for agriculture in the short-term, the Economic Survey has indicated quick and qualitative reform initiatives to double the growth rate of the farm sector to four per cent.

''The short-term outlook for agricultural sector appears bright...In the medium-term, the prospects for agriculture will be determined by the pace and quality of reforms in this sector.'' The momentum in growth in financial services registered a hefty growth rate of 11.1 per cent in 2006-07. Trade, hotels, transport and communication services continued to grow at double-digit rates for the fourth successive year.

UNI