Shrugging off despondency over the gloomy state of the economy, the Economic Survey 2012-13 on Wednesday suggested a slew of hard, but good decisions to stick to the path of fiscal consolidation and rescue the economy out of the morass.
While disfavouring higher tax rates for the rich, even in the wake of the “danger” of missing fiscal targets for the current year, the Survey, tabled in Parliament by Finance Minister P. Chidambaram, pitched for cutting subsidies on oil and fertilizers, especially urea, and called for widening the tax base.
Claiming that the downturn was “more or less over” and that the economy was looking up, the Survey projected a cautiously optimistic growth rate of 6.1-6.7 per cent for 2013-14 while conceding that the GDP (gross domestic product) growth for the current fiscal was likely to slip to the decade’s low of five per cent — compared to the estimates by the CSO (Central Statistics Office) of 6.2 per cent for 2011-12 and 9.3 per cent the year before.
Addressing a press conference later, the Survey’s lead author Chief Economic Adviser Raghuram G. Rajan said: “These are difficult times but India has navigated such times before and with good policies it will come through stronger … There is a glimmer of turnaround. The conditions are in place for a turnaround in economy as we do not expect a global headwind like last year ... but much of it we have to do domestically.”
In its prescription to meet the challenges, the Survey’s primary recipe is to shift national spending from consumption to investment, remove the bottlenecks to investment, growth and job creation and alongside make efforts to reduce the cost of funds.
The basic prescription thus calls for a marked policy shift from consumption-led growth — as was pursued during the global meltdown — to investment-led growth along with easing the inter-ministerial tangles of clearances and procedural norms.
Cautioning against a hike in tax rates — as has been debated in pre-budget discussions — the Survey maintained that the government should widen the tax base to raise revenue and cut subsidies, particularly on petroleum products, to reduce the expenditure bill.
“It is much better to achieve a higher tax-GDP ratio by broadening the base which is taxed 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,” it said.
On the specific issue of the rising subsidy bill which is widening the fiscal deficit, the Survey said: “The danger that fiscal targets would be breached substantially becomes very real in the current year … controlling the expenditure on subsidies will be crucial. The domestic prices of petroleum products, particularly diesel and LPG, need to be raised in line with their prices prevailing in the international market.”
The government had pegged the fiscal deficit at 5.1 per cent for the GDP for 2012-13, which the Finance Minister later revised to 5.3 in view of the rising expenditure and subdued revenue collection. For the new fiscal, Mr. Chidambaram has committed to bring it down to 4.8 per cent.
The Survey also highlighted the concern at the widening current account deficit, mainly on account of high gold imports, the absence of clear signs of revival of economic activities and the lack of assured supply of raw material to projects.
