Policy push, private investment  to help revive economy: Survey

Economic Survey for 2013-14 says current industrial downturn presents an opportunity to push ahead with critical reforms and remove infra bottlenecks

NEW DELHI : The near-term industrial upturn is conditional on continued improvements in the policy environment and a quick return to peak investment rates, according to the Economic Survey for 2013-14.

The survey, presented in Parliament on Wednesday, also called for a boost in investment by private sector and positive policy impetus for reviving business. The survey exuded confidence that with the improvement in the overall macroeconomic environment, industry is expected to revive and growth can accelerate gradually over the next two years.

“In the view of the ongoing industrial slowdown, the policy focus needs to target key growth drivers in the short term. One of the crucial drivers can be the revival of private corporate sector investment…Building a conducive investment climate and uplifting overall business sentiment require close coordination of industrial policy with fiscal, trade, FDI and exchange rate policies,” the survey said.

Allowing FDI in defence and some other sectors has huge potential for attracting large-scale investment, the survey added. The survey also pointed out that the current industrial downturn presents an opportunity to push ahead with critical reforms and remove infrastructure bottlenecks.

From the infrastructure sector perspective, augmenting coal production, permitting commercial coal mining, restructuring power distribution, upgrading road and rail networks, reducing delays in regulatory approvals, land acquisition and rehabilitation and solving financing constraints are some of the issues that require urgent attention, the survey added.

The fiscal situation of the central government is worse than it appears, given the acceleration of inflation from 2006 to 2014, the Survey said.

 Moderation in inflation would help ease the monetary policy stance and revive the confidence of investors. The Survey acknowledged that inflation has eased but is still above comfort level.

 After tabling the Survey, Jaitley told reporters that fiscal deficit for the current year will be 4.5 per cent which needs to go down further in the next two years.

 In 2014-15, the Survey claims that the economy is poised to overcome the sub-5 per cent growth of GDP witnessed in the last two years which affected in particular the industrial sector.

It, however, sounded a cautious note saying agriculture production may be impacted this year if a likely El Nino torpedoes monsoon rainfall, putting pressure on food prices.

The Survey says investment can be revived by improving long term growth prospect. For this, reforms are needed on three fronts: creating a framework for sustained and low inflation, setting public finances on a sustainable path by tax and expenditure reforms and creating the legal regulatory framework for a well functioning market economy.

 First, the government must ensure a low and stable inflation rate through fiscal correction, establishing a monetary policy framework, and creating a competitive national market for food.

 Initiation of reforms on these fronts will reduce inflation uncertainty and restore a stable business environment. Further lower inflationary expectations would increase domestic household financial saving and make resources available for investment.

 The government must put public finances on a sustainable path through tax and expenditure reforms. Tax reforms require a Goods and Services Tax (GST), Direct Taxes Code (DTC) and more predictable tax administration.

The Survey said that complex taxation system needs a revamp through new laws, GST and DTC, as “bad taxes” like surcharges, cess and dividend distribution levy need to “eventually go” so as to boost investments as well as GDP growth.

“Replacing all existing indirect taxes by the GST will create a national market, eliminate cascading taxes, and align taxation of imports and exports correctly. This will improve the competitiveness of production and export from India,” it added. The implementation of a Central GST (CenGST) could be the first step towards the GST, the survey said.

Expenditure reforms must focus on public goods, new designs for subsidy programmes and mechanism for accountability.

 “India requires the legal and regulatory frameworks for a market economy. This requires repealing the old legacy laws and creating state capacity to market reforms,” it said.

Calling for a new Fiscal Responsibility and Budget Management (FRBM) Act, it said, “Fresh thinking is required on a responsible fiscal policy framework… The modified act needs to take into account business cycles and to have penalties that are strong enough so that it cannot be ignored.”

FISCal HEALTH


l Need new FRBM Act “with teeth”. Need fresh thinking on fiscal policy framework
l Subsidy reforms essential to fiscal consolidation
l Raising tax-GDP ratio essential to fiscal consolidation
l Need to incentivitise domestic savings to cut gold demand
l Fiscal consolidation achieved through spending cuts. Better to cut fisc gap via tax mop up than expenditure cut
l Agricultural, allied sector registered 4.7% growth in FY14
l FY15 CAD may be limited to around $45 bln, 2.1% of GDP. FY14 fiscal deficit contained at 4.5% of GDP
l Better to meet fisc consolidation through higher tax

REFORMS, SUBSIDY

l Need common market for agricultural commodities

l Should consider direct transfer of fertiliser subsidy

l Fertiliser, food subsidy rationalisation essential.  Need tax, expenditure, regulatory reforms for growth

l Addressing subsidies must to achieve quality fiscal control

l Tax system must move away from sops for individual industry

l Replacing all indirect taxes by GST to create national mkt

l Increasingly feasible to make cash payments for subsidies

l DTC required as clean modern replacement for existing laws

l Next wave of infra funding needs a capable bond market

l Strengthen power cos standard, rationalise tariff

GROWTH, INFLATION

l Inflation has eased, but still above comfort level

l Consumer Price Index Inflation has shown signs of moderation FY14 CPI at about 9.49%

l Must ensure low inflation via fiscal consolidation

l Risk to inflation view from sub-normal monsoon in 2014-15

l Growth can revive to 7-8% only after FY16

l Agricultural, allied sector registered 4.7% growth in FY14

AGRICULTURE

l No cause of alarm on El Nino as grain stock adequate

l Examine inclusion of farm-related taxes in GST. Reform APMC, land tenancy laws

l Must remove curbs on farmers to buy, sell, store produce

l India commodity market not enabled to be a price setter

l To curb inflation, make farmers part of national market

l Arbitrary cane price fixation by states hitting sugar mills

l Land acquisition, rehabilitation needs urgent attention

MONETARY POLICY, EXTERNAL SECTOR

l Need formal monetary policy framework for targeting CPI

l There are concerns about balance sheet quality of banks…Banks’ poor asset quality a major concern in FY14

l Govt steps may create space for monetary easing later FY15

l Poor monsoon FY15 likely risk to RBI accommodative stance

l Sustaining BoP a challenge as some curbs need to be lifted

l Downside risk to India’s export from external shocks…World trade, India exports still fragile

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