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Survey pegs growth at 8.1 pc
*Favours reform of tax system
*Industrial growth at 9 pc
T.R. Ramachandran
Tribune News Service

Highlights

  • Economic growth projected at 8.1 per cent
  • Industrial growth pegged at 9 per cent
  • No quick-fix solutions for sustained economic growth and stability
  • Faster development of critical infrastructure
  • Foodgrain production to increase by 2.3 per cent
  • Cycle of growth and savings to continue
  • Quality infrastructure must be speeded up through appropriate policy stimulus
  • Tax system reform favoured
  • Reversal of slowdown in mining sector, particularly coal
  • Faster consolidation of Fiscal Responsibility and Budget Management Act
  • Uncertainty in inflation outlook because of high and volatile international petroleum prices.
  • Scope for better productivity in expenditure and greater growth dividend by deepening reform process

New Delhi, February 27
Even as the economy is projected to grow at a robust 8.1 per cent in the current fiscal, the 2005-06 Economic Survey cautioned about the risks of inflation, hardening interest rate and fiscal deficit.

It called for hastening tax and labour reforms coupled with measures to remove infrastructure bottlenecks and shifting from the current minimum support price and public procurement system by developing alternative product markets for broad-based agricultural development.

“The odds are loaded heavily in favour of continuing the growth momentum observed in the last three years. A virtuous cycle of growth and savings appears to be already under way. Household savings rate will increase with accelerating income growth,” observed the pre-Budget Survey, which was tabled in Parliament by Union Finance Minister P. Chidambaram today.

Unlike other countries, transiting to ageing societies, India’s demographic dividend will pay off with a larger and younger labour force gainfully employed in production and generating a larger national income.

Giving its empirical strength, the country’s per capita income should be four or five times what it is now, providing a bright outlook for growth in the medium term.

The multi-pronged challenge lies in providing an appropriate policy framework to harness the dormant talent pool of the Indian workforce and entrepreneurs to position the economy on a sustained high growth trajectory.

The first and foremost component of meeting this challenge is through speedy provision of quality infrastructure.

The growth prospects are intricately intertwined with the rapid development of physical infrastructure like power, roads, ports and airports, along with efficient delivery of such services. Industrial resurgence is manifest in an anticipated growth of 9 per cent, which is driven by performances in the manufacturing and construction sectors.

Growth of services sector continued to be broad-based. Among sub-sectors of services — trade, hotels, transport and communications — continued to lead by growing at double-digit rates for the third successive year. Expanding the railway passenger network and telephone connections, particularly mobile phones, played key roles in such growth.

Financial services, comprising banking, insurance and real estate services, also maintained the momentum with progressive maturing of Indian financial markets and the ongoing construction boom.

The rally in gross domestic capital formation that had commenced in 2002-03 continued and as a proportion of GDP reached a high of 30.1 per cent in 2004-05.

Stock market index returns of 11 per cent in 2004, followed by 36 per cent in 2005, provide a good measure of investor sentiments.

The Survey said the increasing trend in gross domestic savings, which provides most of the resources for investment, as a proportion of GDP since 2001-02 held firm, with the savings ratio rising from 26.5 per cent in 2002-03 to 29.1 per cent in 2004-05.

Price stability was maintained despite an increase of 44.5 per cent in the average world price of Indian basket of crude oil from $ 37.3 per barrel in April-November 2004 to $ 53.9 per barrel in April-November 2005 and $ 58.10 per barrel on February 13, 2005. The pace of accretion to foreign exchange reserves has slowed sharply during the current year.

Until February 10 this year, there was reduction of $ 1.1 billion from the end-March 2005 level of $ 141.5 billion.

During April-September last year, foreign investment flows at $ 7.4 billion were nearly $ 5 billion higher than such flows of $ 2.5 billion in the first half of 2004-05.

Overall investment in infrastructure continued to remain far below the requirement and net capital stock in electricity, gas and water supply grew at a compound annual rate of 3.7 per cent between 1993-94 and 2003-04. There are indications of slow progress in fiscal consolidation at the Centre in the current year. This may be made up by faster progress on this front by state governments.

Buoyant revenues in states and significant improvement in their combined fiscal position shows the process of deepening fiscal reforms and restructuring of public finances, as envisaged by the 10th Finance Commission, have had a headstart.

A well-defined regulatory architecture has to be in place to increase the comfort level of players in the market.

Caution must be exercised in constituting the Sixth Pay Commission to ensure that the fiscal deficit does not increase to a peak of 9.9 per cent, as evidenced with implementation of Fifth Pay Commission recommendations.

The survey underlined the need for appropriate pricing of petroleum products.

With medium-term prospects of crude prices remaining high, the continuance of incomplete pass-throughs is not sustainable without serious consequences to the financial health of oil companies and the exchequer. Perverse incentives for fuel switching and distortions arising from different tax rates need to be addressed.

The Survey stressed for a shift in emphasis and to focus attention on the quality of outcome of the various social sector programmes dealing with health and education.

The journey for sustained economic growth and stability is a long one and quick-fix solutions for higher fiscal deficit to temporarily propping up growth through expansionary policies, albeit in increasing productive capacity, would prove to be counter-productive.

There is much scope for better productivity in expenditure and greater growth dividend through deepening the reform process, that could harness higher savings and investment, the Survey added.
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