Reform tune, some notes off-key

ECONOMIC SURVEY 2003-04

IN SIGHT: Overhaul tax exemptions, SSI reservations, and facilitate FII inflows.

The Economic Survey for 2003-04, tabled in Parliament on Wednesday, has kept reform hopes alive by recommending an overhaul of the tax exemptions regime, removal of remaining items from the reservation list of small-scale industry, a review of the cost-based minimum support price mechanism for agricultural commodities, cutting customs duty rates to ASEAN levels, flexible labour laws and easy entry and exit norms for companies.

The Survey is, however, silent on some critical reform areas. There is no mention of the direction that small savings interest rates should take, and on further reforms in public sector banks.

At present, the government holds at least a 51 per cent stake in PSU banks, and a Bill to pare the government stake to 33 per cent has lapsed. Further, it has skirted the contentious issue of the ballooning subsidy, and has paid mere lip service to expenditure management.

While the Survey has recommended user charges in physical infrastructure, it warned against raising charges for basic social services.

Citing international experience, it said the cost recovery for basic social services did not generate much revenue and adversely affected the utilisation rates, especially by the poor. Raising services charges would be counter-productive and should be avoided, it said.

The Survey says the vital elements for achieving a 7-8 sustainable growth includes a step-up in public investment in agriculture where capital formation had declined since the mid-1990s, continuation of a lower interest rate regime, liberalisation of the foreign direct investment (FDI) and foreign institutional investment (FII) norms, introduction of value added tax regime from April 1 next year and higher infrastructure investments.

The spectre of the Fiscal Responsibility and Budget Management Act (FRBM), however, loomed large over the government's post-mortem of the Indian economy, with the survey stressing the importance of fiscal consolidation to create more space for augmenting the expenditure on social and physical

infrastructure. "Without fiscal consolidation, a step up in public investment cannot be attained," the Survey said, referring to the Tenth Plan's estimate of an increase in investment rate from 24.4 per cent in 2001-02 to 32.3 per cent in 2006-07.

The Survey has also warned that interest rates and inflation may increase if private investment picks up and there is undue pre-emption of resources by the government to fund its deficit.

While the interest rates may harden with the fiscal deficit remaining high and a pick-up in the flow of credit to the commercial sector, inflation may increase on the back of a surge in global oil prices. Both could dampen the momentum in growth recovery in the recent past.

Pitching hard for an over 10 per cent industrial growth in the coming years, the Survey has said that like Indian auto companies, other sectors too can grow rapidly with appropriate scale, investment and technology.

While the survey has acknowledged the growth in the services sector and consequent creation of specialised jobs, it has emphasised the need for the industry to grow rapidly. Not only will this boost the overall growth rate of the economy, but also generate jobs for the existing unemployed and the new entrants, who are projected to increase 1.9 per cent a year.

With a single digit tax-GDP ratio, the focus in the fiscal consolidation process should be to increase tax revenues, the Survey says.

There is a clear need to overhaul the tax exemptions regime, reduce the number of notifications, simplify procedures and establish a rigorous penal and enforcement mechanism to check evasion. It has also called for innovative tax laws to check large-scale evasion-prone cash transactions, which hindered the business re-engineering process.

The Survey has voiced concerns on the rigidity in lending rates despite a sustained fall in deposit rates. While large top-rated companies are able to borrow at even sub-PLR, other borrowers have hardly benefited. It, however, expects inflation to remain benign at around 5 per cent during this fiscal, with the manufacturing group expected to see an inflation of less than 5.7 per cent registered in 2003-04, and that in the primary sector likely to be lower than the last fiscal's 4.2 per cent.

While prospects of agricultural production are considered bright for the current fiscal on the back of good rains, the Survey has pointed out that not enough attention has been paid to the sector, which provides livelihood to 58 per cent of the country's population. Food management, however, continues to be inefficient with unsustainable level of food subsidies.

The Survey has pointed out that infrastructure investment, as a percentage of GDP, has declined from 5.4 per cent in 1993-94 to 3.7 per cent in 2002-03.

User charges, exploitation of new technologies, private sector production and a regulatory framework that fosters competition, should bring the necessary investment in the core sector, it says.