FISCAL CONSOLIDATION TO ESTABLISH ROBUST GROWTH
T.V.
Sriram *
Concerned over a
falling 4.4 per cent GDP growth during the current financial year,
the pre-Budget Economic Survey 2002-2003 endorsed the Kelkar Panel’s
recommendations on tax reforms besides cut in subsidies and interest
rates to deal with the mounting fiscal deficit. The Survey singled
out the deteriorating fiscal situation as a "major challenge"
and listed labour reforms, disinvestment and overhauling of regulatory
regime in agriculture as other priority areas to achieve an 8
per cent growth. Mooting a two-pronged strategy of augmenting
revenues and restraining expenditure for fiscal consolidation,
it said modernisation of tax administration and broadening the
base are essential for meeting this objective.
On the expenditure
front, the Survey said "It is critical to contain the growth of
wages, salaries and pensions. There is a need to revise the rate
of interest on small savings mobilised by the Government in line
with movements in market-related interest rates." Any successful
expenditure rationalisation and reprioritisation programme must
address the issue of subsidies through a rationalisation of the
prices of food, fertilisers, LPG and kerosene, it said. ‘There
is a need to look into the whole issue of federal fiscal transfers,
including the role of the Plans, gross budgetary support for the
Plans and why Plan expenditure affects fiscal deficit and debt
adversely.
Concerned over the
drought and low exports of farm products, the Survey said what
was needed was an overhaul of the regulatory regime in agriculture.
A closely related issue was the question of labour market reforms
and small scale industry reservation. Further, it was essential
to restructure the tax system with a move to an impersonal and
efficient tax administration with a minimum interface between
the assessee and the tax official and a system with minimum of
exemptions in excise and states’ sales tax and move to Value Added
tax(VAT) system by the states from April 01, 2003.
With India emerging
as a surplus producer of a number of exportable agricultural products
in recent years, efficient management of the country’s food economy
has become a major policy issue, the Survey said. The comparative
and regional advantage of some crops has, however, been distorted
by minimum support prices for rice and wheat, thus generating
both surpluses and shortages.
The accumulation
of large food stocks has raised serious issues with regard to
the effect on the current food management policy, not only on
agricultural growth and diversification but also on the fiscal
deficit, it said. The Survey said there is a need to economise
on buffer carrying costs, as also procurement costs, which may
be possible by involving State participation in procurement. The
Food Corporation of India (FCI) is faced with serious economies
of scale, since it is now procuring and stocking almost three
times the normal volume of grains.
The Iraq war threat
cast doubts over the pace of global recovery, but the country’s
burgeoning foreign exchange reserves of over 74 billion US dollars
has made India as one of the preserve - holding countries besides
making it capable of financing higher import bills in the event
of any steep escalation in global oil prices . prolonged
conflict in West Asia, however, is likely to affect the export
prospects of several economies of developing Asia, due to their
heavy dependence on the US economy.
Notwithstanding a
marginal compression in export prospects, the overall growth performance
of the Indian economy in the coming months is unlikely to be seriously
affected by the developments in the Gulf due to the clear signs
of revival in domestic demand and the resultant buoyancy imparted
to domestic economic activity, the survey said. "Neverthless,
there is an imperative need to address the three issues of infrastructure,
regulatory and tax reform, and fiscal consolidation to establish
and strengthen the foundations of robust growth on
a sustained basis, it said. Though inflation remained under
control at 3-4 per cent during the year, the latest uncertainty
caused fuel price inflation to touch 6.4 per cent in mid-January.
The Survey added that in spite of the volatility in global currency
markets in the aftermath of September 11, the rupee value has
remained more or less stable.
While merchandise
exports grew well in 2002-03, services exports have also been
an important area of success. Facilitated by relatively lower
inflation, interest rates continued to soften during the year.The
gross non-performing assets of scheduled commercial banks increased,
Capital markets continued to be subdued and public finances of
both the Centre and the States remained under pressure since 1997-98
after the implementation of the Fifth Pay Commission’s recommendations,
it said. During the first nine months of the current year,
central finances seem to have considerably improved with a fiscal
deficit at Rs 86,269 crore, slightly lower than Rs 89,014 crore
in April-December in the previous year. The remaining part
of the year, however, could see some pressures on both revenue
and expenditure, it said adding "unanticipated weakening of the
growth momentum may affect revenue collections.
The Survey underlined
that flexibility in restructuring expenditure will have to come
mainly from an improvement in revenue collections. The existence
of a fairly large unorganised sector, exemptions and evasions
have affected the buoyancy of tax collections. Public investment
has been partly constrained by increasing government consumption
expenditure, which included expenditure on wages and salaries,
commodities and services. It said the drivers of change and rapid
growth acceleration have to be technology and competition, together
with benchmarking to the best international practices.
The automobile sector,
previously under a strict licensing regime, has been a direct
beneficiary of competition and technology in the new liberal regime.The
Survey said telecommunications industries and consumer goods have
also shown remarkable progress. Amongst the priority areas requiring
focussed attention are the elimination of illiteracy, reduction
in infant and maternal mortality rates, eradication of diseases,
provision of quality transportation facilities like roads, rail,
ports and airports, reasonably priced power supply and safe drinking
water and sanitation, it added.
Continued progress
on infrastructure, movement towards low and uniform customs tariff,
move to Value Added Taxation, reform of labour laws, elimination
of small scale reservation and framework for swift resolution
of failure are the six elements which, the Survey felt, would
foster productivity and industrial growth.
The pick-up in growth
of the Indian economy observed in 2001-02 was stronger than what
had been initially anticipated. The monsoon failure, however,
affected agriculture severely with agriculture and allied GDP
declining by 3.1 per cent as per the advance estimates released
by the Central Statistical Organisation on February 07, 2003.
The overall GDP growth
in the current financial year is likely to be only 4.4 per cent,
said the Survey. But according to it in spite of a severe monsoon
deficiency, the rebound in growth observed since 2001-02 gained
momentum in industry and services sectors in the current financial
year ending March 31, 2003 would continue. There is an imperative
need to address the three issues of infrastructure, regulatory
and tax reforms and fiscal consolidation to establish the foundation
of a robust growth on a sustained basis, the Survey concluded.
*
Special Correspondent, Press Trust of India, New Delhi
