Reforms are the way to go: Survey

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Our Bureau

New Delhi, Feb. 25

THE pre-Budget Economic Survey calls for enhancing the recent buoyancy in investment and exports to leverage higher growth in the economy with success in this regard depending on "how vigorously reforms are pursued to improve the investment climate and augment infrastructure".

In a clear-cut indication of what the 2005-06 Union Budget holds in store, the Survey, tabled in Parliament on Friday by the Finance Minister, Mr P. Chidambaram, unequivocally states that "sustaining the reform process in tax and expenditure regimes is a sine quo non for achieving the targets" set under legislative remit.

"The tax base needs to be widened through increase in the share of services in tax revenues, removal of exemptions that do not conform to the established principles of tax policy, and an enforcement mechanism that is non-discretionary, transparent and effective."

Progress towards aligning customs duties to Asean levels, which helped improving competitiveness of the economy and fuelled export growth, needs to continue.

The Survey also made a strong case to revisit the issue of FDI sectoral cap in coal mining, insurance, real estate and retail trade.

Stating the need to sustaining expenditure reforms through containing unproductive expenditure, the Survey said: "The way forward is in fulfilling the National Common Minimum Programme (NCMP) objective of targeting subsidies sharply at the poor, carrying on with pension reforms, maintaining a benign interest regime through lower Government borrowings, effecting a shift in the composition of expenditure in favour of Plan capital expenditure, and reforms in public service delivery."

Growth performance of the Indian economy during 2003-04 and 2004-05 shows "a possible ratcheting up of the trend rate of growth of the economy, from around six per cent to about seven per cent per year."

However, it is sceptical of sustained high growth with the extant levels of investment and hence, proposes a set of quintuples to step up investment.

Foremost is the issue of increased investment in agriculture and allied activities for bringing more area under irrigation, better water management, roads, electrification, agricultural extension and research, and more public-private investment on post-harvest facilities to help diversification of the rural economy beyond not only cereals but agriculture itself.

The vibrancy of agricultural exports noticeable in recent years could get an impetus from such investments.

Second is the issue of simplifying procedures and relaxing entry-exit barriers, it said, adding that in China, the average time taken to secure the necessary clearance for a start-up or to complete a bankruptcy procedure is much shorter than in India.

It said that the country's labour laws, particularly Chapter VB of the Industrial Disputes Act 1947, allow firms "less latitude than the labour laws do in China, Brazil or Mexico".

Easing the entry-exit barriers would be critical to determining the success of the textile sector in reaping the enormous potential benefits of the post-quota regime.

The Survey said that small-scale sector reservation has constrained investment in some sectors such as knitwear having large growth potential, with "little justification" for its continuance since all such items are now "freely importable".

Third is the issue of finance as farmers and enterprises should have access to finance at competitive rates.

There is need for greater competition and efficiency in banking to bring spreads down, reduce non-performing assets, and improve credit culture and better credit-appraisal skills to identify the future winners among start-ups and small-scale units.

"The vibrancy of equity markets ought to be extended to the debt market by moving to a screen-based anonymous order matching and competition among alternate trading platforms."

Subject to prudential norms, the participation of pension funds and contractual saving schemes in equity and long-term debt market needs to be encouraged not only to benefit industry, agriculture and infrastructure, but to allow the small savers to cash in on the handsome returns that such markets are likely to pan out.

Fourth is infrastructure, where there is a need for an appropriate policy framework enabling public-private partnership; fifth is the need for higher foreign investment to fill critical gaps in infrastructure and other productive sectors, the Survey said.

(This article was published in the Business Line print edition dated February 26, 2005)
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