News Column

BAD NEWS ECHOES AHEAD OF BUDGET DAY

July 9, 2014



Annual survey points at worst growth slowdown in 30 years

Talks of need to recast subsidy regime & improve business climate

IT'S FAR worse than it looks.

The Economic Survey 2013-14 is out, and it says the nation's economy and finances are in dire straits. The fiscal situation, in particular, has turned out to be far worse than the UPA government's window-dressing made it out to be. Add untamed inflation and the possibility of a drought this year, and Finance Minister Arun Jaitley becomes the man in the eye of a perfect storm.

Given the acceleration of inflation from 2006 to 2014, the survey emphasised the need for tough measures to shore up public finances and reduce inflation in order to nurse the economy back to a 5.5-5.9 per cent rate of growth at best during the current fiscal. It warned, however, that a weak monsoon could play spoilsport and fuel food inflation. The Economic Survey "shows the gravity of the economici situation that needs correction," Jaitley told reporters after presenting the report to Parliament. "Inflation needs to be moderated further. The fiscal deficit needs downward correction over the next two years," he added in a sombre tone.

A significant suggestion of the survey was the need to restructure Coal India Ltd so as to feed fuel-starved power plants. Coal India produces about four fifths India's coal but has consistently failed to meet targets for years. " The process of restructuring CIL needs to be pushed through swiftly to boost coal production," the Economic Survey said, adding that the government should also allow commercial mining by private companies (See separate report in My Biz, Page 26).

The minister said that the fiscal deficit for the current year would be 4.5 per cent of GDP which needs to go down further in the next two years. This is much higher than the per cent estimate in the interim budget prepared by former finance minister P. Chidambaram. The former finance minister's fiscal target has turned out to be unrealistic, because the previous government has left a stack of unpaid bills due public sector oil companies as well as a big pile of fertiliser subsidies that will eat into this year's finances.

Chidambaram's sleight-of-hand exercise provided a mere `63,427 crore as subsidy for petroleum products in his interim budget budget for 2014-15. That number far smaller of the actual subsidy `96,880 crore that the government had to eventually shell out in 2012-13 as the subsidy on kerosene, diesel and LPG. It is expected to go up to `1.3 lakh crore during the current fiscal.

Jaitley has inherited a fiscal mess.

Subsidy

Similarly, Chidambaram provided only `67,970 crore in the interim budget for meeting the fertiliser subsidy bill of the government which is also likely to go up.

India risks losing its investmentgrade sovereign rating if it fails to its finances into shape. In May, P affirmed a negative outlook India's credit rating. Last year, warned there was a one-third chance of a downgrade to "junk" status without a big improvement the fiscal deficit and in implementing reforms.

The economic survey has recommended tackling food and fertiliser subsidies to lower spending while broadening the tax base. India's tax collection is less than 9 per cent of GDP, a quarter of the average in the OECD group of developed nations. "It is better to achieve fiscal consolidation partly through a higher tax-GDP ratio than merely through reduction in the expenditure-to-GDP ratio, in view of the large unmet development needs," the report said.

The measures suggested in the economic survey to revive the economy include massive investment in infrastructure, marketlinked reforms, boost to manufacturing, tax reforms and structural changes in various sectors to bring the economy back on track (see accompanying reports). Moderation in inflation would help ease the monetary policy stance and revive the confidence of investors.

With the global economy expected to recover moderately, particularly on account of performance in some advanced economies, the economy can look forward to better growth prospect in 2014 and beyond, it said.

Employment

The Economic Survey said the defining challenge in India today is that of generating employment and growth. Jobs are created by firms when firms invest and grow.

Hence it is important to create environment conducive for firms to invest, the survey said (See accompanying report).


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Source: Mail Today (India)


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