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Growth forecast rosy, govt focuses on 6 reform areas

BS Reporter  |  New Delhi 

The pre-Budget Economic Survey, tabled in Parliament here on Thursday amidst a scenario of economic and political gloom, has projected a sharp improvement in the growth rate of gross domestic product from 6.9 per cent in the current year to 7.6 per cent in 2012-13 and to 8.6 per cent in the following year.

Presenting an optimistic outlook for the economy, the Survey said the “weakness in economic activity has bottomed out and a gradual upswing is imminent”. Its forecast draws inspiration from calculations based on tracking several statistical indicators and projections of incremental capital-output ratios. The World Bank’s latest economic update projected India’s growth rate for next year at 7-7.5 per cent and the PM’s Economic Advisory Council has projected it even higher at 7.5-8 per cent.

The highlight of this year’s Survey, however, is not its rosy growth forecast, but its focus on six key areas of reform that it believes can help the economy grow at a rapid pace. The six areas are: Efficient contracts, minimal intervention in fixing prices, flexible labour laws, acquisition of land by the government for industrial projects, giving subsidies directly to users, and a fixed subsidy on diesel.

* 6.9% GDP growth in 2011-12, 7.6% in 2012-13 and 8.6% in 2013-14
* Fixed subsidy on diesel as interim step towards full price deregulation
* Leaving land acquisition to the market would mean giving in to hold-ups 
* FDI in multi-brand retail should happen in big cities first; small kirana stores should get incentives

At the moment, the price of diesel is fixed, and the losses of the oil marketing companies are made good by the government. A fixed subsidy on every litre of diesel sold, the Survey said, could be an interim step towards full price deregulation, though “not ideal”. This will transfer a chunk of the current burden from the government to the users, and will bring in efficiency in the usage of the fuel.

To support the government’s plan to make available inexpensive food for all, the Survey has also called for direct transfer of subsidy to the targeted beneficiaries, with which they can buy food items from the market. This subsidy, it added, would have to be periodically adjusted in line with the price in the market.

“In devising the mechanisms for delivering such benefits, we have to utilise the forces of the market, not ignore them.” The Aadhaar unique identification number could be used for such cash transfers, the Survey added. “Aadhaar has the potential for being a game-changer for the Indian economy.”

The Survey has made a case for acquisition of agricultural land by the government for industrial projects because private entrepreneurs had failed on this count. Often, it has been experienced, land acquisition gets held up because a few farmers do not want to sell. “To leave it completely to the market would mean giving in entirely to the hold-up problem,” the Survey said, which would “slow down industrialisation”. “This is the reason why government intervention is considered necessary,” it added.

Choosing to stay away from making any specific fiscal policy suggestions, the Survey has instead called for flexible labour laws, from the perspective of both employers and workers. It has noted the absence of such labour laws “means smaller organised labour markets with stagnant wages”. It also called for more transparent exit routes for firms, which would free up huge tracts of land locked in sick units.

Price controls, the Survey said, bred corruption, inflated the government’s subsidy bill and distorted market signals, which caused a loss in efficiency. And contracts need to be reviewed, it said, so that the ease of doing business in the country improves.

The Survey makes a significant suggestion with policy implications for the government. It has supported foreign direct investment in multi-brand retail, but has added that the liberalisation of this sector should first take place in big cities even as small kirana stores should be given some incentives. The Survey has also lamented the inadequacy of finance for infrastructure, but stopped short of endorsing genetically modified crops to boost farm produce.

Explaining why the economy would grow 6.9 per cent in 2011-12, down sharply from the original estimate of nine per cent made by it in February 2011, the Survey noted the slowdown was partly rooted in domestic causes like inflation (that remained over nine per cent for much of the year) and "democratic politics", which slowed reforms. But, with inflation bottoming out and interest rates likely to ease, growth will improve to 7.6 per cent (with an error possibility of 0.25 per cent) in 2012-13 and 8.6 per cent in 2013-14.

The government’s finances, it admitted, were under stress on the revenue side as well as the expenditure side. While the 2011-12 Budget had projected expenditure to grow 4.9 per cent during the year, it had grown 13.9 per cent in the first nine months. On the other hand, corporation tax and excise duty collections have been below projections and disinvestment revenues have fallen short of the target because of the depressed stock market sentiment.

“Consequently,” the Survey said, “slippage is likely in the revenue and fiscal deficits budgeted this year notwithstanding the efforts taken to minimise it.” In order to fix the problem, the Survey has said the tax-GDP ratio should be raised from 10.5 per cent in 2011-12 to 13 per cent by 2016-17.

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First Published: Fri, March 16 2012. 00:18 IST