Survey outlines reformist steps for India to grow faster

India needs to recast its subsidy regime, raise tax revenues, remove barriers on farm trade and improve the business climate to meet the aspirations of its people, the annual report card on the country's economy said Wednesday, while pegging a higher overall growth of 5.4-5.9 percent for this fiscal.

A day ahead of the national budget for this fiscal, the Economic Survey 2013-14 tabled in parliament by Finance Minister Arun Jaitley, also suggested a series of measures that must form the next phase of economic reforms to recapture the growth momentum and remove the problems that undermine the country's long-term potential.

India's economic growth fell below 5 percent in the past two consecutive years -- the worst performance in almost three decades.

The growth slowdown in the last two years was broad-based, affecting in particular the industry sector, the survey observed.

The report -- normally authored by the chief economic advisor in the finance ministry, but, with the post lying vacant, compiled this time by Finance Secretary Arvind Mayaram -- called for the revival of business sentiments as that would be at the heart of restarting the investment cycle and pushing economic growth.

"There has been increasing concern about the difficulties faced by firms operating in India. In a purely economic sense, it is easy to explain the actions of a government that restricts firms in certain ways in order to address market failures," the survey said.

"However, the Indian landscape features numerous government interventions that are not connected to market failures. Therefore, there is immediate need to simplify processes including those related to tax policy and administration."

On inflation, it said both wholesale as well as retail inflation were likely to decline by the end of 2014.

But it warned that the prices may spike if monsoon remain sub-normal.

There are risks to the outlook for inflation from a possible sub-normal monsoon during 2014-15 as predicted by the India Meteorological Department on account of the El-Nino effect, possible step up in the pass-through of international crude oil prices, and exchange rate volatility.

Moderation in inflation would ease the monetary policy stance of the Reserve Bank of India (RBI) and revive the confidence of investors, and with the global economy expected to recover moderately, particularly on account of performance in some advanced economies, the Indian "economy can look forward to better growth prospects in 2014-15 and beyond".

Downside risks to the economy remain from a poor monsoon, external environment and poor investment climate.

The survey points out that the fiscal situation of the country is worse than it appears, as the government managed to contain the fiscal deficit at 4.5 percent of GDP in the financial year 2013-14 largely by cutting plan and capital expenditure, which is unsustainable.

The annual document said fiscal consolidation remains imperative for the economy, both in the current context and the years to come with the emphasis on maintaining the quality of 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, the report said.

It said addressing the risk of food, fertilizer and petroleum subsidies is critical.

"Another challenge lies in improving tax buoyancy, and overall shortfall in non-debt receipts could be contained with greater efforts at mobilisation and reforms."

The survey called for putting public finances on the sustainable path through fiscal correction.

It also called for a new Fiscal Responsibility and Budget Management (FRBM) Act with teeth, better accounting practices, greater transparency and improved budgetary management.

It argues that improvements on both tax and expenditure are needed to obtain high quality fiscal adjustment.

To control food inflation, the survey suggested the need for restoring economic freedom of farmers by allowing them to be part of a competitive national market.

"Rationalisation of subsidies on inputs such as fertilizer and food is essential. Government needs to eventually move towards income support for farmers and poor households, so that market forces are able to respond to changes in consumption and technology."

It also said direct cash transfers is the right way to subsidise soil nutrients and that fuel prices must be market driven.

In recent years, the country's tax policy, especially after changes were made in capital gains levy with retrospective effect, have come under sharp criticism from both domestic and overseas investors.

The survey highlighted the need for simple, predictable and stable tax regime, and pushed for an early implementation of the related reforms like Goods and Services Tax (GST) and Direct Taxes Code (DTC).

It suggested that the government expenditure reform should involve three elements: Shifting subsidy programmes away from price subsidies to income support, a change in the focus of government spending towards provision of public goods, and a focus on outcomes through an improvement in systems of accountability.

According to the survey report, the country will require a whopping $1 trillion investment in infrastructure over the next five years.

"The real challenge is not only to identify a core set of projects that are crucial for accelerating overall economic growth but also to ensure channelisation of investment for such viable infrastructure projects."

Services sector that contributes around 57 percent to the GDP has come under pressure in the past two years due to continued global and domestic slowdown. However, early shoots of revival are visible in 2014-15 with signs of improvement in some key areas like IT, aviation, transport logistics, and retail trading, it said.