New Delhi, Feb. 27: The odds are the economy will continue to grow at a spanking pace on top of the 8.1 per cent GDP growth slated for this year. A cycle of savings fuelling growth, which started some years back, will grow bigger as both household income and savings increase.
That’s the topside, says the Economic Survey, which was released here by the finance minister.
But there’s a flipside as well: to continue the growth momentum, the government must take hardnosed decisions to hasten tax reforms, including bringing in the EET (exempt, exempt, tax) regime, which taxes savings when they are withdrawn, and bring in contentious but much needed labour reforms to unshackle industry.
Indian industry itself needs to be unburdened from a high level of taxes and distortive exemptions that provides ‘perverse incentives’. The FDI cap for captive mining, especially coal, has to be lifted to pep up the sector, which is vital to India’s infrastructure needs.
The passage of the Pension Fund Regulatory Development Authority Bill needs to be speeded up to mop up greater investible resources. Improvements are also needed to streamline and make the securities market healthier in areas of disclosures, trading technologies and policies on derivatives, removing the problem of multiple bids, strengthening the investigation and surveillance and improving the functioning of bond markets.
The government also needs to exercise caution while constituting the Sixth Pay Commission to avoid another round of near bankruptcies among states forced to pay higher wages than they can afford.
At the same time, subsidies which make up 13.5 per cent of the government’s revenues, need to be rationalised ' both oil subsidies as well as subsidy to farmers by way of minimum support prices for grain crops. To wean farmers away from the MSP regime, alternative product markets need to be developed.
Labour laws also need to be overhauled. The survey says “Indian labour laws are highly protective” and suggested drastic reforms taking a cue from the Chinese.
But even after doing all that homework, some of which is politically difficult to accomplish, things could still go awry. Both the survey and finance minister P. Chidambaram, who spoke to reporters after tabling it in Parliament, made it clear.
There are three “downside risks” ' the government’s deficit, rising oil prices and stiffening interest rates. However, Chidambaram promised to stick to fiscal prudence. “We should not be tempted to stray from the path of fiscal prudence ... We will meet fiscal reform and budgetary management targets in 2006-07.”
The government’s efforts to continuously reduce fiscal deficit, or excess of expenditure over income, every year through the FRBM Act had been paused last year but is expected to be re-started this year.
Global oil prices can be expected to remain high, bringing with it “the danger of an unprecedented price increase (which) was ever-present.” And the survey admits, high and volatile global petroleum prices places a question mark on the interest rate scenario, which may pose a risk of dampening the domestic investment boom.
However, the finance minister said the government will judiciously address the issue of oil subsidies to mitigate the price-rise impact on the economy. The movement towards market-determined prices in the hydrocarbon sector has floundered pending resolution of subsidies in domestic LPG and kerosene distributed through the PDS.
While interest rates were hardening throughout the world, the government and the Reserve Bank would continue to see to it that industry and farm sectors manage to get cheap credit to sustain economic growth.
But if these were all the pitfalls, perhaps things would still look rosy. Interest payouts have risen from Rs 1,03,175 crore in 2001-02 to Rs 1,30,833 crore in 2005-06.
However, as a percentage of revenue, interest payments fell from 53.4 per cent in 2001-02 to 38 per cent this year. But “these declining trends are on account of progressive reduction in the average cost of borrowing.” The survey says the government’s debt stock expressed as a percentage of the GDP has risen from 49.4 per cent in 1996-97 to 63.2 per cent in 2005-06.