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Economic Survey moots major tax reforms
February 25, 2005 13:27 IST
Last Updated: February 25, 2005 14:08 IST
Projecting a 7 per cent growth rate in 2005-06, government's pre-budget Economic Survey on Friday outlined reforms in tax and expenditure and labour laws as a priority in the Budget and favoured opening up of more sectors, including retail, to foreign direct investment to push up investment.
Big-ticket investment
Identifying agriculture, infrastructure and employment as areas for big-ticket public investment, the 2004-05 survey stressed the need for maintaining low interest and inflation rates and integrating the whole country towards a common market.
The survey, tabled in Parliament, was hard hitting on the fiscal situation of both the Centre and states and proposed major tax and expenditure reforms, cutting down wasteful subsidies to reduce fiscal and revenue deficits.
Custom duties
It said customs duties should be aligned to ASEAN levels to enhance competitiveness and fuel export growth and tax exemptions be phased out along with bringing in more services into the tax net to make up for the lowering of both direct and indirect tax rates.
Tax reform
"Both the Centre and states need to improve their tax administrations to have an impersonal and hassle-free regime, with low compliance cost for honest tax payers and a high risk for the evaders," it said suggesting a phased rationalization of central sales tax to remove tax on inter-state sales.
On tax reforms, the survey said higher tax revenue has to be realised not through increasing rates, but through innovative changes in policies, procedures, laws and dispute settlement mechanism that help overcome the problems associated with the present complex system.
Open up more sectors for FDI
To transform Indian manufacturing into globally competitive units, the survey said there was a strong case to revisit the issue of FDI caps in sectors like coal, mining, insurance, real estate and retail trade.
The survey said the growth performance of the Indian economy during 2003-04 and 2004-05 indicated a possible ratcheting up of the trend rate of economic growth from around 6 per cent to about 7 per cent per year.
Yet, vigorous efforts are needed to accelerate growth to achieve Common Minimum Programme mandate of ensuring that the economy grows at least 7-8 per cent per year in a sustained manner over a decade.
On FDI, it said opening up retail sector would not only organise a significant part of the largely unorganised retailing, but can also invite established global retail brands into the Indian market, creating greater outlets for sourcing and marketing Indian products.
"Organised retail formats will also help in upgrading the quality of products, establishing efficient supply chains from farm to market and generating greater employment," it said.
Inflation
On inflation, the survey said there is a downward trend, particularly for agro-based products during January-March every year due to seasonality of prices. The current year is no exception to this general trend.
GDP growth
The survey said growth projection of 6.9 per cent this year has surpassed all projections made at the beginning and early part of the year. The current account of the balance of payments has turned into a deficit showing an excess of investment over savings.
Asserting there are five issues that needed to be addressed to step up investment, it said apart from pushing up agriculture development, simplifying procedures, relaxing entry-exit barriers and removing infrastructure bottlenecks be given top priority.
Labour laws
The survey said Indian labour laws, particularly Industrial Disputes Act, allow firms less latitude than the labour laws in China, Brazil or Mexico.
For business start-ups, a large number of clearances have to be taken at the central and state levels, it said, adding that such a system introduces delays and creates avenues for corruption.
Emphasising that small-scale reservation has not succeeded in giving the expected results and constrains investment in some critical sectors, the survey said there was little justification for continuance of such reservations since all such items were now freely importable.
Easing the entry-exit barriers will be critical in determining the success of the textiles sector to reap the enormous potential benefits of the post-quota regime.
Infrastructure
Asserting that infrastructural inadequacy constrained economic growth, the survey said there was a need to find an appropriate policy framework enabling public-private participation in the infrastructure sector.
It identified telecom, roads, ports and civil aviation as thrust areas in infrastructure development and said efforts should be continued to enhance energy security by augmenting infrastructure of trans-border gas pipelines given the volatility in global crude oil prices in the recent years.
Fiscal steps
It said fiscal consolidation has remained intractable despite initiatives of successive budgets at reducing deficits, primarily because of lack of accountability in fiscal marksmanship.
Fiscal consolidation cannot be sustained without the active involvement of states, which account for about 39 per cent and 56 per cent of combined revenue receipts and expenditure, respectively.
Stock markets
The survey also favoured vibrancy in the equity markets to be extended to the debt market by moving to screen-based anonymous order matching and competition among alternate trading platforms.
Subject to prudential norms, the participation of pension funds and contractual saving schemes in equity and long-term debt markets needs to be encouraged not only to benefit industry, agriculture and infrastructure but also allow the small savers to cash-in on the handsome returns that such return markets are likely to yield in the medium term.
Administration
There is also a need to suitably restructure the administrative machinery and put in place mechanisms for monitoring outcomes, it said adding this opportunity must be used actively to build robust rural infrastructure.
Referring to the minimum subsidy bidding, the survey said the potential service provider quoting the lowest amount becomes eligible for subsidy payments.
Eligibility is subject to fulfilling a specified level of performance or service provision obligation, it said, adding this is a promising strategy for extending infrastructure services to poor consumers in commercially unviable, sparsely rural areas.
This is a useful strategy for creating facilities like roads, sanitation, and waste management for which complete cost recovery through user charges alone was not feasible, it said.
Many countries have deployed this approach in sectors as varied as telecom, electricity, road construction and maintenance and civil aviation, it said.
Underlining the need for enhancing the buoyancy in investment and exports to leverage growth, the survey said success in this regard will depend on how vigorously reforms are pursued to improve the investment climate and augment infrastructure.
VAT
One of the challenges in fiscal reform will be reconciling the need for fiscal consolidation with appropriate tax reforms. The announced introduction of VAT at the state level from April one, 2005 will go a long way in removing the cascading effect of the extant sales tax regime, it said.
The survey expressed doubts if the 10 per cent industrial growth as projected by mid-term review of tenth plan will be achieved with the current levels of investment simply by reducing the incremental capital output ratio.
Even after its increase in the last two years, the investment rate continues to be not only far below that in China and East Asia but also lower than that assumed in the Tenth Plan.
Referring to the difficult fiscal situation of states, the survey said the 12th Finance Commission has recommended that each state should enact fiscal responsibility legislation providing for elimination of revenue deficit by 2008-09 and reducing fiscal deficit to three per cent of state domestic product.
This recommendation, together with the Commission's linking of central debt relief to states with fiscal reforms, should be effectively utilised by both the Centre and the states to pursue fiscal consolidation at the state level, it said.
Appreciating the diversification from foodgrains into areas like fruits and vegetables, floriculture, dairy and poultry, the survey said much more needed to be done to encourage such diversification.
"There is a colossal loss of output due to inadequate storage and transport facilities and lack of sufficient food processing capacities," it said adding more public and private investment on these post-harvest facilities was required.