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Economic Survey 2014: A dose of realism is required, says Taimur Baig of Deutsche Bank

The survey is a wishlist of a number of important reforms India needs to pursue to get growth and job creation.

Updated: Jul 10, 2014, 06.14 AM IST
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The survey is a wishlist of a number of important reforms India needs to pursue to get growth and job creation.
The survey is a wishlist of a number of important reforms India needs to pursue to get growth and job creation.
By: Taimur Baig, Chief Economist, Asia, Deutsche Bank

Ahead of the FY15 Union budget, the Economic Survey paints a sober picture of the economy. It recognises the myriad challenges, from the need to reduce the budget deficit substantially to the risks to inflation stemming from inclement climate and fiscal dominance.

Forecasting growth to remain below 6% this year, the survey nevertheless argues that the recent string of sub-5% growth is behind, with some upside ahead for industrial sector activities.

The biggest threat to the forecast is agriculture, as sub-par monsoon could affect farm production considerably. The survey is a wishlist of a number of important reforms India needs to pursue to get growth and job creation. We like the following three in particular in the context of budget preparation:

RAISING TAX/GDP RATIO: India’s revenue ratio is one of the lowest among its peers, and there is a limit to spending rationalisation that’s feasible. Hence it is critical to pursue tax reforms to reduce loopholes and widen the tax net. GST reform would help in medium term, but in near term, major tax administration efforts toward improving tax compliance is needed. Also, without a revival in industrial activities, which helps corporate profits to improve, tax ratios will stagnate.

SUBSIDY REFORM: While full subsidy elimination is not on the agenda, at least on fuel products there is room for substantial subsidy reduction. On food and fertiliser, there is scope for increasing the efficiency of disbursement.

STRENGTHEN THE FISCAL RESPONSIBILITY FRAMEWORK: Although a fiscal responsibility law is supposed to guide a path toward consolidation, the track record of recent years shows that the law needs more teeth. Beyond these, we commend the survey’s recognition that in order for India’s much-needed investment recovery to take place, meaningful progress has to be made in reducing fiscal deficit (that would free resources for investment), stabilising and lowering inflation (thus lowering the cost of business operations), and strengthening the legal and regulatory framework (which would improve the functioning of the economy). This underscores that a few executive decisions and legislative tinkering won’t be sufficient for a sustainable recovery, much heavier lifting is needed.

Finally, we are encouraged by the survey’s endorsement of a formal inflation-targeting framework. Since the RBI published its paper on inflation targeting earlier this year, we have been concerned that the Centre, faced with the challenge of high debt and deficit, would shy away from accepting an approach that would imply higher real interest rate and lower nominal GDP growth (one of the outcomes of lower inflation). By unequivocally supporting the approach, the survey has provided a welcome support to the battle against inflation.

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