Saturday, July 4, 2009

Economic Survey (2008-09)

The pre-budget Economic Survey for 2008-09 presented in the Parliament India’s economic growth may accelerate to about seven per cent this year provided there is a normal monsoon and the government undertakes sweeping reforms like abolition of fuel subsidies and expansion of infrastructure.
Growth Rate and Inflation
The speed at which the country’s economy would return to a high growth trajectory in the short term also depends on a revival of the global economy, particularly the US economy, the survey stated. India should be back on the path of 8.5 percent to 9 percent growth per annum provided policy and institutional bottlenecks are removed, it added.
The survey, prepared by the finance ministry, also said inflation was no longer a worry and called for an urgent return to the targeted fiscal deficit of three percent. The deficit grew to 6.2 percent in 2008-09 as the Government unleashed stimulus spending to insulate the economy against the global meltdown. The survey also called for offloading equity in public sector undertakings, reform of fertilizer and food subsidies and auction of third-generation cellular phone spectrum.
The survey said the government should take advantage of the recent low price in oil costs to deregulate petrol and diesel prices. It also urged it improve the investment climate including hiking the foreign investment cap in insurance to 49 percent from 26 percent. Foreign Direct Investment (FDI) in multibrand retail should be allowed, starting with food retailing, and price controls on sugar and fertilizers should be removed, the survey noted.
Manufacturing: The survey said the size of the Indian market and the unmet demand for industrial products provides reasonable hope that demand would not be a constraining factor. There is also a reasonable consensus that given the market situation, industry is unlikely to face a price deflation, it said.
It said manufacturing posted 2.4 percent growth in the last fiscal against 8.5 percent in the year-ago period. The pace of slowdown accelerated in the second half of 2008-09 with the sudden worsening of the global financial markets and a bleak economic outlook. With jobs getting lost by the thousands as a fallout of the downturn, the survey asked the government to review labour laws for pushing growth in employee-intensive sectors.
Exports: The Government should slash customs duties, streamline export promotion schemes and pay special attention to infrastructure to overcome the contracting exports on account of the ongoing recession faced by India’s major trading partners, the survey stated.
The survey stated that besides short-term relief measures and stimulus packages, some fundamental policy changes are also needed for the merchandise trade sector.
The survey called for “weeding out unnecessary customs duty exemptions” and rationalising the tax structure, including specific duties, in a calibrated manner, taking into account the specific duty levels prevailing in the trading partner countries.
Fiscal Deficit: The government should also assess the possibility of entirely eliminating fiscal deficit, but with flexibility that it could be widened at a time of economic slowdown, the survey suggested. It urged the government to review the possibility of zero fiscal deficit as part of Fiscal Responsibility and Budget Management (FRBM) II.
Tax Reductions: Noting the country’s tax system continues to be complex, the survey asked the government to undertake further reforms including implementation of a uniform tax structure. It said the introduction of a Goods and Services Tax (GST) would be opportune for deepening the reforms process already underway. GST is scheduled to be implemented from April 1, 2010.
Public Sector Undertakings: Some of the suggestions in this year’s Survey are extremely sensible, such as subsidising kerosene only for non-LPG and non-electricity rural homes, ending leakage of subsidies, introducing a new income-tax code or phasing out a plethora of transaction taxes, surcharges and cesses.
The advice to rein in the burgeoning deficit and put the government back on the path of fiscal responsibility is laudable. To do this, the Survey suggests the government can get Rs 25,000 crores annually through disinvestments: offloading 10 per cent from unlisted PSUs after getting them listed, and auctioning off loss-making PSUs. It has also advised the Government to decontrol oil, fertiliser and drug prices in order to further stimulate the economy.
The biggest items of reform are the disinvestment proposals in the Survey. It suggests selling 5-10 per cent equity in identified profit-making non-Navratna PSUs, listing of all unlisted PSUs and selling of a minimum of 10 per cent equity to the public, auctioning of all loss-making PSUs that cannot be revived, and negative bidding in PSUs with zero net worth in the form of debt write-offs.
The survey is critical of the way the oil price hike was handled, but it supports the politically sensitive issue of freeing the petrol and diesel prices from government control. It means consumers will pay global rates of oil and government subsidy will cease. The housewife will get only six to eight cylinders of subsidised cooking gas in a year and for the rest she will pay the market price. The sudden hike in the petrol and diesel prices on Wednesday has already shocked consumers and more such shocks are possible in future should the oil prices shoot up again.
Timely implementation of the projects is, therefore, essential to maintain their financial viability. Then there are policy and regulatory gaps, inadequate availability of long-term finance and inadequate capacity of the private sector. As part of the solution, the survey has called for establishing a regulatory authority for the transport sector covering the highways, railways, ports and airports.
The recommendations may not be fully reflected in the budget. Yet, its survey of the macroeconomy and its analysis indicate the direction in which government policy would be moving.
Highlights of Economic Survey
* Unleash reforms - phase out cesses, surcharges and transaction taxes (such as commodities transaction tax, securities transaction tax and Fringe Benefit Tax)
* Introduce new Income Tax Code that results in neutral corporate tax regime
* 7-7.5 percent growth possible in 2009-10
* Allow 49 percent FDI in defence and insurance; permit FDI in multi-format retail starting with food
* Proposes another round of fiscal stimulus including tax cuts and increase in expenditure
* Decontrol petrol and diesel prices; end Government monopoly in railways,
* coal and nuclear energy
* Lift all bans on future contracts to restore price discovery; decontrol sugar and fertiliser
* Revitalise disinvestment programme to generate Rs 25,000 crore annually, list all PSUs and auction those beyond revival
* Economic growth decelerated in 2008-09 to 6.7 per cent from nine per cent in 2007-08
* Fiscal deficit in 2008-09 shot up to over 6 per cent from 2.7 per cent in 2007-08
* Survey indicates FRBM-II to get back to path of fiscal consolidation
* Complete the process of selling 5-10 per cent equity in identified profit-making non-’Navratna’ PSUs
* List all unlisted PSUs and sell a minimum 10 per cent equity to public.
* Auction all loss-making PSUs that cannot be revived
* In PSUs with zero networth, allow negative bidding in the form of debt write-off
* Auction 3G spectrum
* The auctioned spectrum must be freely tradable, with capital gains on spectrum to be taxed under the Income Tax Act
* Rationalise Dividend Distribution Tax to ensure full single taxation of returns to capital in the hands of the receiver
* Reform petroleum (LPG, Kerosene), fertiliser and food subsidies to reduce leakages and ensure targeting
* Limit LPG subsidy to a maximum of 6-8 cylinders per annum per household
* Phase out kerosene supply-subsidy by ensuring that every rural household has a solar cooker and solar lantern
* Review customs duty exemptions and move to a uniform duty structure to eliminate inverted duties
* Implement GST from April 1, 2010
* Rapid operationalisation of UID Authority within 3 months
* Agriculture growth fell sharply to 1.6 per cent in 2008-09 from 4.9 per cent
* Exports grew at 3.4 per cent to 168 billion dollar in 2008-09 from 163 billion dollar in previous fiscal
* Imports grew at 14.3 per cent to $287.75 bn from $251.65 bn
* Trade balance deteriorated to $119.05 bn from $88.52 bn.

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