The Hindu Business Line : Economic Survey — Setting the stage for a reform Budget

The Economic Survey is bullish on the Indian economy. But will the Budget find a place for its suggestions on further FDI liberalisation and stronger fiscal balance? Hopefully, the Finance Minister will be able to mollify the Left over FDI liberalisation, and perhaps offer concessions elsewhere in order to make the Budget a reform and growth-oriented one, says S. Venkitaramanan.

Hopefully, the Finance Minister, Mr P. Chidambaram, will be able to mollify the Left with suitable concessions in other areas in order to make the Budget a reform and growth-oriented one.

THE Economic Survey for the year has been presented to Parliament. It starts by noting that the performance of the Indian economy for 2004-05 has so far exceeded the expectations formed at the beginning of the year, buoyed by the rebound in the agricultural and allied sectors and strongly improved performance of industry and services.

The economy had registered a growth of 8.5 per cent in 2003-04, contrary to normal trend of a bumper growth year followed by slower growth, the current year has also seen a good rate of growth. The Central Statistical Organisation's advance estimates show that the economy is likely to grow by 6.9 per cent in 2004-05. Industrial growth is buoyant across the economy. Trade deficit had consequently increased in spite of booming exports.

The reserves have, however, increased, thanks to capital flows and invisibles. Our external debt indicators are also robust.

The Economic Survey has pointed to the fact that the fiscal performance has not been as good as was expected. The fiscal deficit so far has in fact been higher than targeted. The Survey provides justification for increased tax collection, including an emphasis on tax-to-Gross Domestic Product ratio.

Appropriate tax reforms, including better tax administration, is the key to fiscal consolidation. Obviously, we cannot expect any more details from the Survey at this stage.

There are indications that the Survey expects custom rates to be realigned to Association of South-East Asian Nation level. The Survey also emphasises the need for phased removal of exemptions.

The Survey refers to five important issues apart from fiscal consolidation. One is investment in infrastructure. Another is the need to emphasise irrigation investment. The third is for simplifying the procedures and relaxing entry and exit barriers. Finance has to be made available at reasonable rates. These are all general observations.

The Survey emphasises the need for higher Foreign Direct Investments as well as Foreign Institutional Investments, which help as much with technological spill over as well as with human capital formation, and contribute to international trade integration, particularly to exports. While the emphasis on FDI is on expected line, the Budget has to translate these good intentions to realities.

There has been much discussion in the media about the role of foreign institutional investors (FIIS). There is a comment in the Economic Survey about the reversal of FIIs' investments in recent months. The link between volatility in the stock market and the FII funds flows has still to be fully established. The news is that a committee has been set up under the Chief Economic Adviser to look into the issues relating to the FIIs.

This is perhaps a reflection of the comments in the Survey that while most of the recommendations of an earlier committee under the Chief Economic Adviser, Mr Ashok Lahiri, are under consideration, another policy effort is under way in the form of a Committee, also headed by the Chief Economic Adviser to evaluate mechanisms for encouraging FII flows while curbing speculative tendencies.

There have been a number of comments in the media today about this Committee and its possible impact on FII flows. Apparently, this relates to the concerns expressed by the Reserve Bank of India Governor, Dr Y. V. Reddy, regarding the need to keep a watch on FIIs and to regulate their flows.

It seems to be premature at this stage of India's development to put a block on the way of FIIs, which have developed considerable stake in the Indian stock market.

Overall, the Economic Survey is bullish on the Indian economy and helps set the stage for the Budget. However, whether its suggestions regarding further FDI liberalisation and stronger fiscal balance will find a place in the Budget remains to be seen; the Left is still up in arms at the prospect of FDI liberalisation. Will its bite be worse than its bark?

Hopefully, the Finance Minister will be able to mollify the Left with suitable concessions in other areas in order to make the Budget a reform and growth-oriented one.

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