Highlights - Economic Survey calls for sharp fiscal correction

NEW DELHI (Reuters) - India's fiscal situation is worse than it appears, Prime Minister Narendra Modi's government said in an economic report on Wednesday that called for tough measures to shore up public finances and reduce inflation.

The finance ministry delivered the annual economic survey - prepared by senior economic advisor Ila Patnaik - on the state of Asia's third-largest economy a day before Modi's new government presents its first budget.

Following are highlights of the report:

FISCAL DEFICIT

* India needs sharp fiscal correction

* Fiscal situation of the central government is worse than it appears

* Need for subsidy reforms for fiscal consolidation

* Recommends raising tax-to-GDP ratio for fiscal consolidation

* Shortfall in revenues can be contained through better mobilisation and reforms

GROWTH

* GDP growth seen at 5.4-5.9 percent in 2014/15

* Economic growth of 7-8 percent not seen before 2016/17

* Downward risk to economic growth due to poor monsoon, external factors

INFLATION

* Government needs to move towards low and stable inflation through fiscal consolidation

* Wholesale Price Index (WPI) inflation expected to moderate by end-2014

* Consumer Price Index (CPI) inflation showing signs of moderation

* Needs to create a competitive national market for food

CURRENT ACCOUNT DEFICIT

* 2014/15 current account deficit may be contained to around $45 billion or to 2.1 percent of GDP

* External debt remains within manageable limits

BALANCE OF PAYMENTS

* Improvement in balance of payments position during late 2013-14 was swift thanks to import restrictions and economic slowdown

* Need to adjust to advanced economies' eventual exit from accommodative monetary policy stance

SUBSIDIES

* Rationalization of subsidies such as fertilizer and food essential

* Need to shift subsidy programme from price subsidies to income support

TAXATION

* Government needs to move towards simple tax regime, fewer tax exemptions and single rate of goods and services tax (GST)

* GST to play vital role in indirect tax reform

* Direct Taxes Code (DTC) required to replace existing income tax laws; will reduce compliance costs and boost tax collection

FOREX MARKET

* Intervention in forex market by Reserve Bank of India is behind accumulation of reserves "generally"

REPORT COMMENTS

* "India needs sharp fiscal correction ... Improvements on both tax and expenditure are needed to obtain high quality fiscal adjustment."

* "It is better to achieve fiscal consolidation partly through a higher tax-GDP ratio than merely through reduction in the expenditure to GDP ratio, in view of the large unmet development needs."

* "Restoring economic freedom of farmers and allowing them to be part of a competitive national market is essential for controlling food inflation."

(Compiled by Tommy Wilkes and Aditya Kalra; Editing by Douglas Busvine)