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February 24, 1999


Economic Survey calls for ceiling on deficit

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The Economic Survey 1998-99 released today called for a constitutional limit on revenue and fiscal deficit and the need for downsizing the government.

The Survey, presented to Parliament, hints at bold policy initiatives to carry the task of economic reforms forward. These include doing away with the reservation for the small scale industry sector, comprehensive re-examination of labour laws and SSI reservation as applicable to exporters, removing export and import controls in certain sectors like agriculture, need for a more liberal and flexible policy for export production, carrying forward the task of decontrol and debureaucratisation and need for the government to withdraw from areas where private initiative can achieve the goals more efficiently. Greater liberalisation of trade on agriculture is also desirable for promoting exports, it says.

The Survey says it is unlikely that the year-end fiscal deficit would be contained within the Budget amount.

The Survey calls for eliminating low priority expenditures and now-targeted subsidies.

It says with only a year left before the start of 21st century, it is the appropriate time to start preparing for a second generation of economic reforms.

Such a reform agenda must include reform of factor markets, public sector, government and other public institutions, legal systems, state-level policies and procedures and reform of critical sectors such as infrastructure, agriculture, education, research and development and agricultural extension.

The financial collapse in East Asia and other countries has, however, emphasised the fact that India has still some way to go in bringing the financial sector (including banking) to international standards. Completion of insurance and pension fund reforms is merely the first step in creating strong and vibrant long-term debt market. Other factor markets such as labour, land, natural resources and corporate management had not been tackled seriously by reforms so far.

The survey calls for broadening the tax base, improved administration and other means to augment revenue mobilisation. The task for reforming the tax system must also be carried forward and completed.

The Survey says it is essential to put the fiscal deficit on an irreversible and unambiguous declining trend. The impact of Fifth Pay Commission and its aftermath on revenue deficits of the Centre, states and local bodies lends urgency to the need for downsizing government.

''The time has perhaps come to reconsider the issue of constitutional limits on the deficit as well as to take up the challenge of reengineering government,'' the survey says.

It says the remaining price and distribution controls must be eliminated. At the same level this must be preceded by a major effort to identify such controls.

Investment controls are the second most pernicious legacy of the control era and remain in several infrastructure service sectors, the survey says and adds that SSI reservation is another form of investment control.

It notes that import and export controls remain widespread in certain sectors like agriculture. Although reform of foreign exchange system has been one of the prominent areas of reform, the operation of exchange controls still requires improvement, particularly for exporters and knowledge-based industries.

Similarly, though some of the well-known financial sector controls have been removed, many controls remain embased in laws, regulations, norms and procedures.

The Survey says the GDP growth rate, which decelerated significantly to five per cent in 1997-98 from 7.8 per cent in 1996-97, recovered to an estimated growth of 5.8 per cent in 1998-99. The recovery would have been firmer but for the East Asian crisis and its effect on world import demand and on international capital markets. The recovery in 1998-99 was led by the rebound in 'agriculture and allied sectors', which is projected to grow by 5.3 per cent. Trade, hotels, transport and communications were the only other category where growth accelerated from 5.7 per cent in 1997-98 to 6.8 per cent in 1998-99. The growth of GDP from manufacturing has slipped to 5.7 per cent, that from electricity, gas and water supply to 6.3 per cent and mining to 0.1 per cent. Total gross domestic savings declined to 23.1 per cent of GDP in 1997-98 from 24.4 per cent of GDP in 1996-97. Public savings declined by 0.5 per cent and household physical saving by 1.0 per cent of GDP.

Real gross domestic capital formation dropped marginally from 26 per cent of GDP (constant prices) in 1996-97 to 25.6 per cent of GDP in 1997-98. However, corporate fixed investment increased from 7.9 per cent of GDP in 1995-96 to 8.3 per cent of GDP in 1996-97 and further to nine per cent in 1997-98. This suggests that Indian corporate industry is responding to the challenge of domestic and global competition, the survey says.

The greatest deceleration in 1998 was in basic goods, from 6.8 per cent growth in April-December 1997 to 1.4 per cent in 1998, the slowdown in mining, basic and intermediate goods is at least partly a reflection of the decline in global prices, the continuing slowdown in the manufacture of consumer goods suggests that an autonomous slowdown in the growth of private consumption has contributed to slower growth of aggregate demand. The decline in agriculture production during the previous year, the decline in asset prices, as reflected in stock prices and real estate, and an increase in uncertainty, are some of the factors that affected consumption.

The only industrial sub-sector, which bucked the trend of declining growth rates, was capital goods. The growth rate of 9.8 per cent for April-December 1998 was significantly higher than the fairly respectable growth of 6.7 per cent in the corresponding months of 1997-98.

Infrastructure performance during April-December 1998 has declined as compared to the corresponding period of 1997. Growth of six infrastructure and core industries (electricity generation, coal, steel, crude oil, refinery throughput and cement) decelerated to two per cent during April-December 1997. While growth rates of coal, refinery throughput and cement decelerated, that of electricity generation accelerated in April-December 1998.

The central government finance during the current year continued to be under stress. The fiscal deficit in April-December 1998 was exacerbated on account of a higher growth in total expenditure at 26 per cent compared to a growth of only 4.7 per cent in total revenue receipts. Thus, preliminary estimates indicate that the fiscal deficit was higher by 77.1 per cent in April-December 1998 over that in April-December 1997, and accounted for about 80.7 per cent of the budgeted fiscal deficit for 1998-99. With continuing shortfalls in collections of indirect taxes due to sluggish growth in industrial production and imports, it was unlikely that the year and fiscal deficit would be contained in the budgeted amount, the survey says.

The current account deficit widened to 1.6 per cent of GDP or 6.5 billion dollars in 1997-98. In 1998-99, it was estimated to fall, as a per cent of GDP, below the level in 1997-98.

The trade deficit, on a BoP basis, increased from 3.7 per cent of GDP in 1996-97 to 3.9 per cent in 1997-98, despite the sharp deceleration in import growth. This is attributable to deceleration in export growth, which continued for the third year in succession in 1998-99, exports declined by 2.9 per cent during April to December 1998, compared to a 3.3 per cent growth in the corresponding period of 1997.


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