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Economic Survey proposes reforms in tax system
Pegs growth rate at 8.1 per cent; cites crude prices as a risk factor

Our Bureau

New Delhi , Feb. 27

If the Economic Survey 2005-06, tabled in Parliament on Monday by the Finance Minister, Mr P. Chidambaram, is an indication of things to come, Indian industry can look forward to some relief on the taxation front. Specifically mentioning that the reform of the tax system remains an unfinished task, the survey has said that the industry needs to be unburdened from high level of taxes and the distortive exemptions that provide perverse incentives. "The process of withdrawal or grand-fathering of exemptions is being speeded up and higher revenues have accrued even with unchanged or lower rates," the survey said.

While that is one specific observation, the survey, in its assessment of the economy, has taken note of the robust demonstration of the nascent strengths of the economy, which is projected to grow at 8.1 per cent in the current fiscal. "The growth trends for the last three years appears to indicate the beginning of a new phase of cyclical upswing in the economy from 2003-04... In contrast to the sharp fluctuations in agriculture, industry and services have continued to expand steadily and have acted as the twin engines propelling the overall growth of the economy.''

Possible risks

At the same time, the survey cautions that the possible risks to an otherwise rosy outlook arise from three factors — inflation, interest rates and fiscal stance. Elaborating, it says that high and volatile international petroleum prices impart an element of uncertainty in the inflation outlook not only for India but also the world economy. "With increasing dependence on imported crude and growing openness, India is no longer insulated from the rest of the world. This inflation uncertainty, together with the unresolved global macroeconomic imbalances, casts it shadow on the interest rate scenario. A continued firming up of global interest rates beyond a point poses the risk of dampening the domestic investment boom," the survey noted.

As for the fiscal risk, both at the Central and State levels, the survey says it arises from the argument that the fiscal adjustment process has led to expenditure compression of the wrong kind. "It is important to safeguard against this argument as the solution lies in not increasing the deficits, but in meeting squarely the challenge of improving the quality of expenditure,'' it said, hinting at pressures to enlarge expenditure without corrective measures of stopping leakages in the expenditure stream.

Disturbing trends

While noting some other positives in the economy like year-on-year growth during 2005-06 (till end-October) in bank credit to industry at a high of 45.7 per cent and increased flow of credit to agriculture and self-help groups, the survey has pointed to some disturbing trends too.

For instance, low inflation in primary articles observed in the last two years came to an end as the point-to-point inflation rate for this group increased from 1.2 per cent to 5 per cent between February 5, 2005, and February 4, 2006.

Similarly, it has been noted that the distinct improvement in manufacturing growth in the last two years notwithstanding, overall industrial growth remained well short of the Tenth Plan target and the deceleration in the growth of mining and electricity sector in the current year may put added pressure on manufacturing to maintain overall industrial buoyancy.

The other negatives include the sharp slowdown in accretion to foreign exchange reserves during the current year, the doubling of the current account deficit, reflecting the burgeoning trade deficit, and infrastructure investment continuing to remain far below the requirement with public-private partnership in this sector meeting with limited success.

Similarly, the high growth pattern in the economy has failed to provide greater employment; rather the unemployment rate during 1993-94 to 2004 on the basis of current daily status went up, in the case of males from 5.6 per cent to 9 per cent in rural areas and from 6.7 per cent to 8.1 per cent in urban areas.

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