 "Slow economic recovery looms")
The Economic Survey tried to paint a realistic picture of the economy, pegging gross domestic product (GDP) growth at 5.4-5.9 per cent for 2014-15, after it had dropped to below five per cent in the previous two years. A day ahead of the Budget, it prescribed the government to go for fiscal consolidation and simplify tax policies to revive the investment climate.
The Survey, presented in Parliament by Finance Minister Arun Jaitley, wanted the government to rein in inflation and ease procedures for higher growth.
Even then, economic growth could tilt towards the lower end — 5.4 per cent — of the projected band this financial year and it might not be before 2016-17 that the economy would revert to seven to eight per cent annual growth, cautioned the Survey.
“Growth in 2014-15 is expected to remain more on the lower side of the range,” it stated. This is because steps undertaken to restart the investment cycle, such as project clearances and incentives given to industry, are perceived to be playing out only gradually. Also, there is benign growth outlook in some Asian economies, particularly China, there is still an elevated level of inflation that limits the scope of the Reserve Bank of India to reduce policy rates and there are expectations of a below-normal monsoon.
Geopolitical tensions might also pose a downside risk to the projections, it warned.
In the previous three financial years, its projections far exceeded the economy’s actual performance on growth (see chart). Last year, it gave a range of 6.1-6.7 per cent for its projection, an overestimate.
Prasad, a senior economic advisor in the finance ministry, said the Survey talked about higher probability towards 5.4 per cent growth because both manufacturing and mining had not picked up, there was uncertainty over the monsoon and despite merchandise exports growing significantly in the first two months of 2014-15, the Baltic Dry Index (a measure of freight movement by sea) was down, putting a question mark over revival in global trade.
Noting the proportion of working-age population was likely to increase from approximately 58 per cent in 2001 to a little more than 64 per cent in 2021, the Survey said the defining challenge in India today was generating jobs and growth. As such, it is important to create a conducive environment for companies to invest.
What to do
Since investments are made on the basis of long-term growth prospects, the key to reviving investment in India lies in reviving the growth of the economy. To do so, reforms are needed on three fronts. Namely, creating a framework for sustained low and stable inflation, setting public finances on a sustainable path by tax and expenditure reforms, and creating a legal and regulatory framework for a well-functioning market economy, said the Survey.
It suggested the government introduce the central part of the Goods and Services Tax to begin with, and simplify the Direct Taxes Code.
It also offered a long-term tax reform recipe — abolish “bad” taxes such as cesses, surcharges, transaction taxes and dividend distribution tax.
In a situation of low growth and high inflation, the Survey mentioned stagflation as well. “The possibility of stagflation raises serious challenges for macroeconomic policy,” it said. Stagflation is a condition of slow economic growth accompanied by persistent high inflation and unemployment.
The Survey, presented in Parliament by Finance Minister Arun Jaitley, wanted the government to rein in inflation and ease procedures for higher growth.
Even then, economic growth could tilt towards the lower end — 5.4 per cent — of the projected band this financial year and it might not be before 2016-17 that the economy would revert to seven to eight per cent annual growth, cautioned the Survey.
“Growth in 2014-15 is expected to remain more on the lower side of the range,” it stated. This is because steps undertaken to restart the investment cycle, such as project clearances and incentives given to industry, are perceived to be playing out only gradually. Also, there is benign growth outlook in some Asian economies, particularly China, there is still an elevated level of inflation that limits the scope of the Reserve Bank of India to reduce policy rates and there are expectations of a below-normal monsoon.
Geopolitical tensions might also pose a downside risk to the projections, it warned.
In the previous three financial years, its projections far exceeded the economy’s actual performance on growth (see chart). Last year, it gave a range of 6.1-6.7 per cent for its projection, an overestimate.
Prasad, a senior economic advisor in the finance ministry, said the Survey talked about higher probability towards 5.4 per cent growth because both manufacturing and mining had not picked up, there was uncertainty over the monsoon and despite merchandise exports growing significantly in the first two months of 2014-15, the Baltic Dry Index (a measure of freight movement by sea) was down, putting a question mark over revival in global trade.
Noting the proportion of working-age population was likely to increase from approximately 58 per cent in 2001 to a little more than 64 per cent in 2021, the Survey said the defining challenge in India today was generating jobs and growth. As such, it is important to create a conducive environment for companies to invest.
What to do
Since investments are made on the basis of long-term growth prospects, the key to reviving investment in India lies in reviving the growth of the economy. To do so, reforms are needed on three fronts. Namely, creating a framework for sustained low and stable inflation, setting public finances on a sustainable path by tax and expenditure reforms, and creating a legal and regulatory framework for a well-functioning market economy, said the Survey.
It suggested the government introduce the central part of the Goods and Services Tax to begin with, and simplify the Direct Taxes Code.
It also offered a long-term tax reform recipe — abolish “bad” taxes such as cesses, surcharges, transaction taxes and dividend distribution tax.
In a situation of low growth and high inflation, the Survey mentioned stagflation as well. “The possibility of stagflation raises serious challenges for macroeconomic policy,” it said. Stagflation is a condition of slow economic growth accompanied by persistent high inflation and unemployment.