The Hindu Business Line : Survey short on policy suggestions

Lest the Left parties should spoil any chance of going ahead with second generation reforms, the Survey calls for "a popular consensus on the twin issues of more flexible labour laws and less friction in the creation and closure of firms in response to normal competitive market dynamics".

New Delhi , July 7

EVEN as the Pre-Budget Economic Survey in the past provided some wrinkles to what the Budget might propose by way of policy measures, the compulsions of coalition governance had of late robbed this benefit, leaving the Survey to read like a pious statement long on exhortations but short on suggesting the requisite policy space for feasible actions.

The 2003-04 pre-budget survey, tabled in Parliament by the Union Finance Minister, Mr P. Chidambaram, and mainly authored by the Chief Economic Advisor, Dr Ashok Lahiri, who got his stint in North Bloc during the National Democratic Alliance (NDA) Government but is retained by the United Progressive Alliance (UPA), naturally extolled the achievements of the past while counselling caution on the need to persist with reforms if the objective of distributive social justice through higher economic growth is not to be derailed.

In keeping with the remit of the National Common Minimum Programme (NCMP) of the UPA dispensation, the Survey proclaims, "India needs to reformulate an anti-poverty strategy that is fiscally sustainable and more finely targeted to those who cannot benefit from the opportunities offered by growth". This is where the Survey goes to emphasise fiscal consolidation as constituting a critical component of economic reforms programme for twin reasons.

First, it has a direct bearing on economic growth by improving the quality of Government expenditure with higher outlays on infrastructure and social sectors. Second, it reduces pre-emption of private savings by the Government and creates more space for the private sector, thus indirectly promoting growth.

The Survey concedes that to achieve the targeted annual average growth of 8 per cent, the Tenth Five Year Plan forecast acceleration in the investment rate from 24.4 per cent in the base year to 32.3 per cent in 2006-07. Of the 7.9 percentage point increase in the investment rate envisaged in the Plan, 2.6 percentage increase would have to flow from the public sector. ``Without fiscal consolidation, such a step-up in public investment cannot be attained,'' the Survey puts it point-blank adding that in the process of fiscal consolidation, with a low tax-GDP ratio, tax revenue augmentation should be the prime concern.

Elaborating further as to how this could be accomplished, it said there is "a clear need to overhaul the regime of exemptions (a la Kelkar and Parthasarathy Shome Committees), reduce the number of notifications, simplify procedures and move towards a paperless and transparent administration, anchored on trust.'' Will Mr Chidambaram adhere to this advice particularly "as the crux of business process re-engineering of tax administration lies in moving from the present officer based assessment to a system of self-assessment, random validation and enforcement?'' As this process is likely to be impeded by the presence of large-scale evasion-prone cash, the Survey plumps for "innovative tax laws and procedures" in consultation with major stakeholders and "a strict penal mechanism" in place.

Expatiating on the virtues of "how a more open trading system leads to utilisation of the virtuous interaction among technology, competition and benchmarking to the best international standards" as is attested by the post-reform experience, the Survey pitches for persisting with the move towards gradually reducing customs duty rates and aligning them with that of ASEAN countries.

As the NDA Government reneged on its commitment to introduce value-added tax (VAT) in the face of intransigence among the States, the Survey gently reminds the UPA constituents that it is essential to adhere to the already announced deadline of April 1, 2005 for transiting to a State-level VAT system with few rates and provision of credit for input taxes for rapid industrial growth across the nation.

The Survey pertinently notes that the services sector alone is unlikely to provide a solution to the country's unemployment problems in the face of the specialised nature of the skill requirements for such services and the eruption of protectionist sentiments for business process outsourcing (BPO) by the developed world.

Hence, it suggests devising strategies for obtaining industrial growth in excess of 10 per cent per annum not only to boost the overall growth rate in the economy but also to generate gainful employment for the existing unemployed and as also for the new entrants. But then this entails removal of market imperfections on land, labour and capital that might not gel well with the Left parties.

That is why the Survey wryly notes, "while reforms can be designed better when the economy is doing well and there is no crisis, mobilising popular support for such reforms is a challenge in the absence of an impending crisis".

But contradicting its own position, it hastens to add that "as the economy is doing well now, the adjustments required to eliminate revenue deficit by March 2008, as stipulated in the FRBM Act, need to be frontloaded."

Does the Survey implicitly presume that there would not be any backlash if revenue deficit is pruned or is it naïve enough to leave the task to the political managers of the day? The right answer to this might be in the Budget being unveiled on Thursday.

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