A day ahead of the Budget, the Survey tabled in Parliament by Finance Minister P Chidambaram also concludes that the worst of the downturn could be over, with the economy returning to a 6 per cent plus rate of growth. But the document, written by chief economic advisor to the Finance ministry, Raghuram Rajan, and his team of economists, warns that a business-as-usual scenario with few reforms will keep “growth slower than it could be and inequality higher than it ought to be”.
To avoid this, the Survey has listed several short and long term policy prescriptions. On direct taxes, it argues for bringing more tax-payers under the net to achieve a higher tax-GDP ratio “rather than increasing marginal tax rates significantly — higher and higher tax rates impinge more and more on incentives to undertake taxable activity, while encouraging tax evasion”.
The former chief economist of IMF has also written an introduction to the Survey, which encapsulates his take on the economy and the agenda ahead. “The slowdown is a wake-up call for increasing the pace of actions and reforms (and) the way out lies in shifting national spending from consumption to investment, removing the bottlenecks to investment, growth, and job creation,” says Rajan.
Projecting a large growth range of 6.1-6.7 per cent in the next fiscal year. Rajan has said he wants to move away from estimating a precise rate of growth, but acknowledged that the current band was large since the economy is at an inflexion point.
“We are at a turning point in the economy, so it is very difficult to estimate where we stand on growth. I am trying to get away from the point forecast to a band of estimates. But the broader question is whether the government is writing policies for growth,” he said at a press conference later in the day.
To push growth, the Survey says land-related issues and implementation of land reforms on priority basis need to be sorted out to revitalise the agriculture sector. It also notes that though the sector has a small footprint, the economy has never done well in years when agriculture slipped.
Among the several structural problems and policy priorities, the Survey focusses on the need to fight inflation, curb fiscal profligacy and generate jobs. The document, for the first time, has acknowledged the problem of joblessness by including a specific section on the issue, and carries through a reality check on the inherent belief that the country is at the cusp of reaping a demographic dividend.
“As the number of people looking for jobs rises, both because of the population dividend and because share of agriculture shrinks, these vulnerabilities will become important... Because good jobs are both the pathway to growth as well as the best form of inclusion, India has to think of ways of enabling their creation,” it says.
The other suggested measures are hike in excise duty, inflation indexed bonds to wean away households from hoarding gold and quick passage of the land acquisition Bill. It points to the need to slash subsidies, particularly on petroleum products, in order to reduce government expenditure.
The survey paints a worrying picture on the rising bad assets in the banking sector, suggesting the need for promoters of projects to put in more of their capital in the equity of a project, and calls for harsh measures in terms of “excising” ineffective promoters from the boards of companies going for debt restructuring.
The survey also calls for further opening of sectors to FDI and fresh curbs on gold imports to contain the current account deficit, but without hike in duty rates.
On specific sectors, the Survey notes that the government is moving to a market price based arrangement for pricing of natural gas. It also suggests a non-operating financial holding company model for public sector banks and further reforms in the power sector.