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Thursday , February 28 , 2013
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Growth boost, downturn cheer
Savings dip fuels hope of tax relief

New Delhi, Feb. 27: The Indian economy will grow by anywhere between 6.1 and 6.7 per cent next year, chief economic advisor Raghuram Rajan said here today while releasing the Economic Survey which analyses the state of the $1.8 trillion economy and hashes some creative policy options as part of an annual rite that precedes the presentation of the Union budget.

“The downturn is more or less over,” Rajan said.

Earlier this month, the Central Statistical Organization (CSO) had left the mandarins in North Block red-faced after it forecast GDP growth at just 5 per cent in the fiscal year that closes on March 31 — the slowest growth in the past decade.

The Survey forecast the economy will grow 5 per cent this fiscal, echoing the projection made by the CSO even though finance minister P. Chidambaram has contested the figure.

“We are batting on a sticky wicket,” Rajan told reporters. “But it’s not an impossible situation… the way out lies in shifting national spending from consumption to investment, removing bottlenecks to investment growth and jobs, and combating inflation.”

The chief economic advisor suggested that the slowdown was a wake-up call for stepping up the pace of policy action and reforms. The Survey calls for cuts in fuel subsidies, opening up more areas to foreign investors, and ushering in financial sector reforms.

It also hints at tax incentives to encourage savings by households in an attempt to prise the economy out of the current moderate growth trap.

It said: “Forecasting at potential turning points is difficult, hence the relatively wide range this time.”

The RBI has estimated that household savings have plummeted to 7.8 per cent this year from 12.2 per cent in 2009-10, while overall savings in the country fell from 36.8 per cent in 2007-8 to 30.8 per cent in 2011-12.

Analysts said North Block could be looking at ways to encourage middle class Indians to save more by offering larger tax breaks for pension and insurance products and home buying.

Dinesh Thakkar, managing director of brokerage firm Angel Broking, said the Survey appeared to imply that tomorrow’s budget “could raise the tax saving deduction limit in investment instruments such as equities, longer-duration fixed deposits, and tax-free bonds”.

The Survey itself speaks of allowing more “reliable financial savings opportunities, including inflation-indexed bonds” as a way out of India’s falling domestic saving rate and rising appetite for investment in gold and silver.

Rajan, the MIT-trained monetary economist, said: “Controlling expenditure on subsidies will be crucial. The domestic prices of petroleum products, particularly diesel and LPG need to be raised in line with their prices prevailing in the global market.”

The government has already moved in that direction by raising diesel prices in September last year and again in January and February this year, with promises of small adjustments every month. The number of subsidised gas cylinders has also been capped at 9 per household.

The Survey also proposes cuts in subsidies, an implicit reduction in defence spending and “re-targeting” welfare expenditure. It seeks a broadening of tax-base and implementation of the Goods and Services Tax to try and winch up the tax-to-GDP ratio which hovers at just under 10 per cent.

“Raising the tax-GDP ratio to above the 11 per cent level is critical for sustaining the process of fiscal consolidation in the long run,” it said.

Economists expect this to mean that the government will roll back the excise duty and service tax cuts it had awarded after the global financial crisis occurred in 2008-09 to garner more money and curb inflationary pressures.

The Survey, which singled out job creation for special mention with a chapter devoted to it, said India was not creating enough productive jobs.