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Economic Survey 2005-2006

Click for Full Budget 2006-2007          Click for previous Economic Survey



Issues and Priorities

The encouraging signs of a pick up in investment and acceleration in growth pointed out by the last Survey have strengthened in 2005-06. The odds, however, are loaded heavily in favour of a continuation of the growth momentum observed in the last three years. A virtuous cycle of growth and savings, that appears to be already underway, is likely to continue for some years to come. Household savings rate will increase with accelerating income growth, particularly with the reinforcement of benign demographic dynamics. The investment rate in the Indian economy is likely to rise with rising domestic savings rate in the years to come.

The ‘demographic dividend’ will also pay off in terms of a larger and younger labour force gainfully employed in production, and generating a larger national income, particularly in a world where many countries are transiting to ageing societies. The multi-pronged challenge lies in providing an appropriate policy framework to harness the dormant talent pool of Indian work-force and entrepreneurs to position the economy on a sustained high-growth trajectory.

Speedy provision of quality infrastructure through appropriate policy stimulus constitutes the first and foremost component of this challenge. India’s growth prospects are intricately intertwined with the rapid development of physical infrastructure such as power, roads, ports, and airports, and efficient delivery of such services. A reversal of the slowdown in the mining sector, particularly coal, is critical in this context.

The total investment required in infrastructure is enormous. The Committee on Infrastructure, headed by the Prime Minister, has estimated the investment requirements as: Rs. 1,72,000 crore in the National Highways sector by 2012; Rs. 40,000 crore for Airports by 2010; and Rs. 50,000 crore for Ports by 2012. A substantial share of this investment is expected to come from the private sector. It is important that the India Infrastructure Finance Company Limited (IIFCL), incorporated on January 5, 2006, not only becomes operational but starts lending funds, especially debt of longer term maturity, directly to the eligible projects to supplement other resources from banks and financial institutions from an early date.

Policies and institutions need to be geared up to meet the specific requirements of the infrastructure sectors in India. A well-defined regulatory architecture has to be in place, to increase the comfort level of the different players in the market. Issues of span of control, and conflicting domains need to be delineated and fleshed out. For example, an energy regulator, cutting across line ministries, needs to be in harness to tap the synergy of the different sectors. The need for faster consolidation as per the Fiscal Responsibility and Budget Management Act (FRBMA) to open up fiscal space for higher outlays on infrastructure, both physical and social, continues.

In the aftermath of the implementation of the Fifth Pay Commission's recommendations, the general government's fiscal deficit had increased in each of the five years to reach a peak of 9.9 per cent in 2001-02. With the announcement of the impending constitution of the Sixth Pay Commission, there is need to exercise caution to avoid a repetition of a similar deterioration in the medium term.

While significant progress has been made in the rationalisation of duties, reduction in the rates of taxes and other reforms, including procedural, the reform of the tax system still remains an unfinished task. The process of simplification and digitization of tax administration, which has been initiated, remains a pre-requisite for a transparent and hassle-free tax system.

In the context of public finance, appropriate pricing of petroleum products assumes significance, particularly with the petroleum-marketing sector dominated by public sector oil companies. With medium-term prospects of crude prices remaining high, the continuance of incomplete pass-throughs is not sustainable without serious consequences to the financial health of oil companies and the exchequer. Besides, the perverse incentives for fuel switching and distortions arising from differential tax rates need to be addressed.

If efficiently implemented, NREGS will decisively address the unemployment situation in the rural areas and change the poverty scenario in the country in a tangible manner. The choice of projects under the scheme is also crucial to ensure that need based and good quality assets and infrastructure are created in the rural areas. With the NREGS serving as a broad based safety net, the entire gamut of expenditure based on anti-poverty initiatives need to be revisited.

Wage employment programmes to provide employment on a day-to-day basis must get transformed to creation of permanent and quality jobs in the growth sectors and productive processes of the economy. It is in this context that labour reforms to accelerate investment, particularly in industry and export-oriented sectors, remain an unfinished important agenda. Furthermore, there is need to vigorously pursue the development of the small and medium enterprises (SMEs) by facilitating provision of adequate bank credit and of clusters with adequate infrastructure; and through removal of limitations of scale by rapid removal of items from the ambit of small-scale reservation. There is a need for a paradigm shift to encourage the banks to look at provision of credit to SME and agriculture more as an opportunity for profit rather than as a social obligation under directed subsidised credit.



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