New Delhi: Stung by the falling 4.4 per cent growth this fiscal, the pre-Budget Economic Survey on February 27 endorsed Kelkar Panel recommendations on tax reforms, besides a cut in subsidies and interest rates to deal with mounting and worrying fiscal deficit.

Setting the reform agenda for the Budget, the 2002-03 survey, tabled in Parliament, singled out deteriorating fiscal situation as a "major challenge" and listed labour reforms, disinvestment, overhauling of regulatory regime including agriculture, and removal of infrastructural bottlenecks as other priority areas to achieve robust eight per cent growth.

Mooting a two-pronged strategy of augmenting revenues and restraining expenditure for fiscal consolidation, it said modernisation of tax administration, broadening the base and restricting the exemptions are needed to improve revenue collections, essential for fiscal consolidation.

Admitting that drought would pull down overall growth rate to 4.4 per cent this fiscal as against 5.6 per cent in 2001-02, the survey said revenues from recovery of user charges have to be tapped, besides phasing out tax exemptions and plugging evasions.

The survey gives no growth projections for the next financial year, but said growth recovery was already visible. However, without fiscal consolidation there was a risk that the pre-emption of resources by the government will crowd out the nascent recovery in private investment.

On the expenditure front, the survey said, "It is critical to contain the growth of wages, salaries and pensions. There is a need to revise the rate of interest on small savings mobilised by the government in line with movements in market related interest rates."

Any successful expenditure rationalisation and reprioritisation programme must address the issue of subsidies, through a rationalisation of the prices of food, fertilisers, liquefied petroleum gas (LPG) and kerosene, it said.

"There is a need to look into the whole issue of federal fiscal transfers, including the role of the plans, gross budgetary support for plans and why Plan expenditure affects the past of fiscal deficit and debt adversely," it said.

Concerned over the drought and low exports of farm products, the survey said what was needed was an overhaul of the regulatory regime in agriculture. A closely related issue was the question of labour market reforms and small scale industry reservation.

Further, it was essential to restructure the tax system with a move to an impersonal and efficient tax administration, with minimum interface between the assessee and the tax official and a system with minimum of exemptions in excise and states sales tax and move to value added tax system by states from April 1, 2003.

While sluggish growth suggests counter-cyclical policies, there is a need to step up progress in fiscal consolidation as the fiscal deficit as proportion of gross domestic product (GDP) has gone up from 4.1 per cent in 1996-97 to 5.9 per cent in 2001-02 and from 9.5 per cent in 1999-2000 to 10 per cent in 2002-01 for the Centre and states together.

With India emerging as a surplus producer of a number of exportable agricultural products, including food grains in recent years, efficient management of the country's food economy has become a major policy issue, it said.

The comparative and regional advantage of some crops has, however, been distorted by minimum support prices for rice and wheat, thus generating both surpluses and shortages.

Accumulation of large food stocks has posed serious issues with regard to the effect of current food management policy, not only on agricultural growth and diversification, but also on the fiscal deficit, it said.

The survey said there is a need to economise on buffer carrying costs, as also procurement costs, which may be possible by involving state participation in procurement. Food Corporation of India (FCI) is faced with serious diseconomies of scale, since it is now procuring and stocking almost three times the normal volume of grains.

The Iraq war threat cast doubts over pace of global recovery, but the country's burgeoning foreign exchange reserves of over $ 74 billion has made India as one of the top reserve-holding countries, besides making it capable of financing higher import bills in the event of steep escalation in global oil prices or other exogenous developments.

However, prolonged conflict in the Middle East is likely to affect the export prospects of several economies of developing Asia, due to their heavy dependence on the US economy.

Notwithstanding a marginal compression in export prospects, the overall growth performance of the Indian economy in the coming months is unlikely to be seriously affected by the developments in the Gulf due to the clear signs of revival in domestic demand, and the resultant buoyancy imparted to domestic economic activity, it said.

"Nevertheless, there is an imperative need to address the three issues of infrastructure, regulatory and tax reform, and fiscal consolidation to establish and strengthen the foundations of robust growth on sustained basis," it said.

Though inflation has been under control at a low three to four per cent during the year, the latest uncertainty has caused fuel price inflation to touch 6.4 per cent in mid January, the survey said, adding in spite of volatility in global currency markets in the aftermath of September 11, 2001, the rupee value has remained more or less stable.

While merchandise exports have grown well in 2002-03, services exports have also been an important area of success. Facilitated by relatively lower inflation, interest rates continued to soften during the year.

Gross non-performing assets of scheduled commercial banks increased, capital markets continued to be subdued and public finances of both the Centre and states have been under pressure since 1997-98 after the implementation of the Fifth Pay Commission, it said.

During the first nine months of the current year, Central finances displayed considerable improvement with the fiscal deficit at Rs 86,269 crore, slightly lower than Rs 89,014 crore in April-December in the previous year.

However, the remaining part of the year could see some pressures on both revenue and expenditure, it said adding, unanticipated weakening of the growth momentum may affect revenue collections.

Expenditure management would also pose larger challenges because of enhanced food subsidies due to higher farm support prices, higher fertiliser subsidy from augmented retention prices, larger subsidies resulting from distribution of LPG and kerosene below market prices and unanticipated expenditure.

The disinvestment programme was running behind schedule and there is likely to be a shortfall in capital receipts under this heat, it said, adding the emerging consensus on the need to speed up privatisation is likely to contribute to fiscal consolidation.

Flexibility in restructuring expenditure will have to come mainly from an improvement in revenue collections, it said, adding the existence of fairly large unorganised sector, exemptions and evasion have affected buoyancy of tax collections.

Public investment has been partly constrained by increasing government consumption expenditure, which included expenditure on wages and salaries, commodities and services for current use, it said.

It said the drivers of change and rapid growth acceleration have to be technology and competition, together with benchmarking to the best international practices.

Automobile sector, previously under a strict licensing regime, has been a direct beneficiary of competition and technology in the new liberal regime, it said, adding consumer goods and telecommunications industries have also shown remarkable progress.

Amongst the priority areas requiring focussed attention are the elimination of illiteracy, reduction in infant and maternal mortality rates, eradication of diseases, provision of quality transportation facilities like roads, rail, ports and airports, reasonably priced power supply and safe drinking water and sanitation, it said.

PTI