Economy on 7% growth track

Don't forget the tough choices: Govt

The finance ministry today said India's gross domestic product might grow well over 7 per cent in the current fiscal, but it tempered this by prescribing tough policies like a review of small savings schemes and foreign investment ceilings.

In its mid-year review, a 38-page document released by Finance Secretary DC Gupta, the ministry identified labour law reform"" amendments to the Contract Labour Act, reservation for small scale units "" and the introduction of the value-added tax as the other priorities.

The review notes that Rs 27,800 crore for food subsidy this fiscal, 10 times the outgo a decade ago, is not sustainable. Also, while price supports for wheat and rice have helped create buffer stocks, they have hindered crop diversification.

The review is silent on disinvestment "" receipts from which in 2003-04 are Rs 1,098 crore against a Rs 13,200 crore target "" a pointer to the government's selloff programme.

Despite the likely shortfall in disinvestment receipts, Gupta said the government would stick by its fiscal deficit target of 5.6 per cent of the GDP for 2003-04.

There is a call for a cut in Customs duty to bring it on a par with Asean members on the back of comfortable forex reserves and an upward pressure on the rupee. The cuts will enable India to integrate better with Asia and put the disappointment of Cancun behind it.

The export slowdown and the turnaround in the current account from surplus to deficit are worrying.

Merely blaming the rising rupee for the slowing export growth misses the larger issues of productivity growth and benefits of a floating exchange rate.

"What is needed is a sector-specific analysis of the hurdles that hinder exports, and measures to remove such hurdles," the review says.

The finance ministry seconds the Reserve Bank of India's view on the rigidity of domestic lending rates. It has asked banks to be more flexible, appraise credit better and improve loan recovery.

The strong macroeconomic numbers, a good monsoon and healthy corporate results have led to the stock market rally. "Indian stocks are considered undervalued relative to other markets, and continue to attract FII investment," the review says.

A bountiful monsoon, a pick-up in industrial activity, moderate inflation and a strong export performance augur well for the economy.

The 7 per cent GDP growth is predicted on agriculture growing 8 per cent and industry 6 per cent. Agriculture could well grow over 10 per cent, as in other years following droughts. Average inflation is seen at 4 per cent.

There is, however, need for a stable policy for exporting foodgrain, particularly when there is a surplus of it. Domestic foodgrain prices must align with the rest of the world. Also, efficiency demands private exporters be allowed to directly buy foodgrain from farmers.

Mid-year review of the economy

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Concerns: Lack of credit, rigidity in lending rates

Remedy: Better credit appraisal, improved recovery culture

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Concern: Inflexibility of administered interest rates

Remedy: Review small savings schemes

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Concern: Inadequate structural reforms

Remedy: Review sectoral FDI, FII caps, labour law amendments, SSI dereservation and introduction of VAT

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Concerns: Lower exports and current account deficit

Remedy: Identify sector-specific hurdles and remove hindrances