Issues and priorities
encouraging signs of a pick up in investment and acceleration in growth pointed
out by the last Survey have strengthened in 2005-06. Investment,
as a proportion of GDP (at current prices), increased steadily from 23.0 per
cent in 2001-02 to 30.1 per cent in 2004-05. Its continued buoyancy is manifest in the rapid
rate of growth of credit and of production and import of capital goods; number
and value of primary issues; and the stock price rally in secondary
markets. Also, with an anticipated
growth of 8.1 per cent in 2005-06, the compound average growth rate of the
economy is likely to exceed 8.0 per cent in the last three years ending in
1.65 The odds are
loaded heavily in favour of a continuation of the
growth momentum observed in the last three years. A virtuous cycle of growth and savings, that
appears to be already underway, is likely to continue for some years to come.
Household savings rate will increase with accelerating income growth,
particularly with the reinforcement of benign demographic dynamics. With the
‘dependency ratio’ on the decline and the growth rate on the rise, the
proportion of people in the working age group will not only be higher but will
also have much higher incomes to save from than the preceding generations. Thus, the household savings rate will
increase further. With its well-known
‘home-bias’, domestic savings finances the bulk of domestic investment in any
country. Thus, the investment rate in
the Indian economy is likely to rise, pari passu, with rising domestic savings rate in the years
to come. And, rising investment rate
will feed back into higher growth, and reinforce the cycle. As the large gap
between investment rate in India and that in East Asian countries during their
take-off stage gets bridged, Indian economy should start posting growth rates
close to the rates observed then in the East Asian countries.
1.66 The ‘demographic dividend’ will also
pay off in terms of a larger and younger labour force
gainfully employed in production, and generating a larger national income,
particularly in a world where many countries are transiting to ageing
societies. The suggestion by various
empirical studies that, given its institutional strengths, India’s per capita income should be four to five times of
what it is now, portends a bright outlook for growth
over the medium term. The multi-pronged challenge lies in providing an
appropriate policy framework to harness the dormant talent pool of Indian
work-force and entrepreneurs to position the economy on a sustained high-growth
provision of quality infrastructure through appropriate policy stimulus
constitutes the first and foremost component of this challenge. India’s growth prospects are intricately intertwined with
the rapid development of physical infrastructure such as power, roads, ports, and
airports, and efficient delivery of such services.
an approximate basis, power shortage, at around 12
per cent in peak and 8 per cent in average terms,
is equivalent to around 50 billion units, or (at Rs. 3 per unit) Rs. 15,000 crore, of foregone generation from utilities. The simplistic assumption of 5 per cent power-intensity
of aggregate output in the economy yields a supply-multiplier
of 20 and an associated GDP-loss of Rs.
3,00,000 crore; but, it
disregards the use of alternative – albeit more expensive
– energy sources, such as captive power. Nevertheless,
inadequate availability of power adversely affects
in a major way not only the output of large industries,
but also irrigation in agriculture and production
of small and medium enterprises.
reversal of the slowdown in the mining sector, particularly
coal, is critical in this context.
Coal meets about 60 per cent of the country’s
total commercial primary energy demand, and generates
70 per cent of all power.
1971-1973, the coal sector continues to be dominated
by central public sector undertakings. During 2004-2005,
with output growth of 5.6 per cent, there was a shortage
of domestic coal, and several thermal power plants
remained at the level of critical supply (3 days’
feed-stock) through the year.
In the current year, while with concerted attempts,
including through imports of 10MT (equivalent to 18MT
of domestic coal), the availability of coal for thermal
plants has improved, the overall problem of shortage persists. The problem of rigidity of the pricing system
that partly led to the shortfall in domestic supply
relative to demand and resulted in shortages has been
addressed in part by the introduction of e-marketing.
During April-November 2005, Coal India Limited
sold 10.2 MT of coal by auction through e-marketing.
But, more needs to be done.
There is a need for further liberalization,
including: allowing an associated coal mining company
engaged in captive mining to sell excess coal to any
other eligible end-users; allocating coal blocks for
captive mining through price-based auctions; and liberalization
of FDI restrictions in joint ventures in captive mining.
1.70 The impact of
roads on economic development is well-known.
For example, in Latin America, a ten per cent increase in the length of roads per
worker has been estimated to increase GDP per worker by nearly two per
cent. Without adequate roads in India, particularly in rural areas, the objective of
agricultural diversification from cereals into perishables such as fruits and
vegetables can not be achieved.
Similarly, lack of an enabling infrastructure remains the single most
important constraint to export growth.
Achievement of the ambitious export target set in Foreign Trade Policy
2004-09 requires a projected augmentation of the installed capacity of ports by
140 per cent. Indian ports have a vessel turn-around time of 3-5 days as
against only 4-6 hours in Singapore and
Kong. Improvement of
airports, passenger amenities and emphasis on targeted tourist segments need to
be vigorously pursued to ensure further sustained boost in the tourism sector.
1.71 The total
investment required in infrastructure is enormous. The Committee on Infrastructure, headed by
the Prime Minister, has estimated the investment requirements as: Rs. 1,72,000 crore
in the National Highways sector by 2012; Rs. 40,000 crore for Airports by 2010; and Rs.
50,000 crore for Ports by 2012. A substantial share of this investment is
expected to come from the private sector.
India has an estimated potential to absorb US$150 billion
of FDI in the next five years in the infrastructure sector alone. It is important that the India Infrastructure
Finance Company Limited (IIFCL), incorporated on January 5, 2006, not only becomes
operational but starts lending funds, especially debt of longer term maturity,
directly to the eligible projects to supplement other resources from banks and
financial institutions from an early date.
1.72 Policies and
institutions need to be geared up to meet the specific requirements of the
infrastructure sectors in India. A well-defined regulatory architecture has to be in
place, to increase the comfort level of the different players in the
market. Issues of span of control, and
conflicting domains need to be delineated and fleshed out. For example, an energy regulator, cutting
across line ministries, needs to be in harness to tap the synergy of the
1.73 There was a step up in budgetary outlays on roads
financed through the enhanced road cess
on motor spirit and high speed diesel in 2004-05 and
2005-06. But, the need for faster consolidation as
per the FRBMA to open up fiscal space for higher outlays
on infrastructure, both physical and social, continues.
The Budget for 2005-06 had to take recourse to a temporary
pause in the process of fiscal consolidation, which,
given the past experience of initial promising starts
followed by subsequent set backs, has given rise to
apprehensions of a reversal. However, the pause in
the revenue deficit is a one-off measure to accommodate
demand on resources as explained in the statement
of the Finance Minister under section 7 of the FRBMA.
Consolidation would resume in the Budget for
2006-07, and the eventual targets of fiscal and revenue
deficits under FRBMA would be met by the terminal
1.74 Following very low or marginal growth in the preceeding four years, Government final consumption expenditure
(GFCE) at 1999-2000 prices grew at 9.2 per cent in
2004-05. This category of consumption expenditure
includes all levels of government; Centre, States,
local authorities and quasi-government bodies. After growing slower than its
private counterpart successively in each of the preceeding
four years, GFCE grew faster than PFCE in 2004-05.
This reversal in trend need not necessarily be a source
of concern if such an increase in GFCE is due to enhanced
outlays on social infrastructure matched by commensurate
outcomes. Furthermore, in the aftermath of the implementation
of the Fifth Pay Commission's recommendations, the
general government's fiscal deficit had increased
in each of the five years to reach a peak of 9.9 per
cent in 2001-02. With the announcement of the impending
constitution of the Sixth Pay Commission, there is
need to exercise caution to avoid a repetition of
a similar deterioration in the medium term.
the rapid growth of public pension liabilities in
recent years, the introduction of the new pension
scheme (NPS) based on defined contribution and greater
investment choice from January
1, 2004 is a welcome development. Relative
to many other countries,
is well-placed, because of its demographic dynamics,
for putting in place a robust pension architecture
that is equitable and efficient.
Addressing the concerns about the safeguards
raised in the Report of the Standing Committee on
the Pension Fund Regulatory and Development Authority
Bill, submitted to Parliament on July 26, 2005, and
the passage of the Bill will lay the institutional
foundation for operationalising
significant progress has been made in the rationalisation
of duties, reduction in the rates of taxes and other
reforms, including procedural, the reform of the tax
system still remains an unfinished task. To be competitive
globally, the Indian industry needs to be unburdened
from the high levels 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 process of
simplification and digitization of tax administration,
which has been initiated, remains a pre-requisite
for a transparent and hassle-free tax system.
fulfillment of the promised mechanism for ensuring
value for money in public expenditure in the Budget
for 2005-06, an Outcome Budget was presented to the
nation on August 25, 2005.
It provides an operational framework through
a set of monitorable indicators, and will become effective from the
next fiscal year.
Together with the Right to Information Act,
it is expected to empower civil society to evaluate
the performance through benchmarks of achievement
that would emerge from various governance structures
across the country. In this context, it is important to avoid the
pitfalls of performance and zero-based budgeting in
the past, and follow not only the letter but also
the spirit of the Outcome Budget.
the context of public finance, appropriate pricing
of petroleum products assumes significance, particularly
with the petroleum marketing sector dominated by public
sector oil companies. The movement towards market-determined
pricing in hydrocarbon sector has floundered pending
the resolution of the issue of subsidy in domestic
LPG and PDS kerosene.
Kerosene prices have remained unchanged since
April 1, 2002 despite the unprecedented
increase in acquisition cost of crude and costs of
1.79 Customs and
excise on petroleum products constitute about 40 per cent of the total
customs/excise collections of the Government.
With an equally high sales tax, ranging from 12 per cent to 38 per cent,
the tax component of the retail price of petrol and high speed diesel remains
high. This has been further compounded
by the duty differential across products, including on the basis of end-use,
leading to problems of fuel-switching and other malpractices. The issue of harmonising
state levies on petroleum products is being deliberated by the Empowered
Committee of State Finance Ministers on VAT. A Committee on pricing and
taxation of petroleum products headed by Dr. C. Rangarajan
has recently submitted its recommendations for a new mechanism of pricing that
promotes efficiency of the hydrocarbon sector on the one hand, and the concerns
of maintaining affordability in prices of cooking fuel for the consumers on the
other. With medium-term prospects of crude prices remaining high, the
continuance of incomplete pass-throughs is not
sustainable without serious consequences to the financial health of oil companies
and the exchequer. Besides, the perverse incentives for fuel switching and
distortions arising from differential tax rates need to be addressed. The
management of the lingering oil crisis requires rapid and bold policy responses
with a firm resolve.
1.80 The 60th NSSO
round indicates unemployment rates in January-June 2004 that cause some
concerns. Mandated by the NCMP, the
enactment of the National Rural Employment Guarantee Scheme (NREGS) on
September 7, 2005 to ensure 100 days of wage employment in a financial year to
an adult member of every rural household who demands employment and is willing
to do unskilled manual work is a landmark initiative in this context. If
efficiently implemented, NREGS will decisively address the unemployment situation
in the rural areas and change the poverty scenario in the country in a tangible
manner. The choice of projects under the scheme is also crucial to ensure that
need based and good quality assets and infrastructure are created in the rural
areas. With the NREGS serving as a broad based safety net, the entire gamut of
expenditure based on anti-poverty initiatives need to be revisited.
employment programmes to provide employment on a day
to day basis must get transformed to creation of permanent and quality jobs in
the growth sectors and productive processes of the economy. It is in this
context that labour reforms to accelerate investment,
particularly in industry and export-oriented sectors, remain an unfinished
important agenda. Addressing the
underinvestment in IT capital in the domestic economy can enhance productivity
and expand the scope for employment. Furthermore, there is need to vigorously
pursue the development of the small and medium enterprises (SMEs)
by facilitating provision of adequate bank credit and of clusters with adequate
infrastructure; and through removal of limitations of scale by rapid removal of
items from the ambit of small-scale reservation. There is a need for a paradigm shift to
encourage the banks to look at provision of credit to SME and agriculture more
as an opportunity for profit rather than as a social obligation under directed subsidised credit.
1.82 A number of
major initiatives have been undertaken in the other areas of social sectors
like health and education. The National Rural Health Mission has been launched
to bring about a qualitative improvement in the public health care delivery in
the rural areas. Allocation for elementary education sector has been increased
substantially during the year. It is however important now to shift emphasis
and focus attention on the quality of outcome of the various social sector programmes rather than their quantity or coverage. For
example, the quality of education being imparted at the elementary level,
rather than just access or only enrolment of children in school, needs to be emphasised through appropriate modifications in the
guidelines and their implementation. This will ensure that the children passing
out of the school system have a better chance of contributing productively to
the economy. While universal coverage has been achieved in
terms of opening of health centres in most states,
the quality of public healthcare services both in the rural and urban areas
need urgent improvement.
management and delivery of the social sector programmes
necessitate adequate capacity building at all levels, decentralisation
of implementation and transparency in delivery and accountability of the
agencies involved. Evaluation studies repeatedly indicate that only those programmes tend to succeed which have elements of the above
critical success parameters. Budget 2005-06 has emphasized that all Plan
schemes need to be evaluated once in five years, and only then be eligible for
carry forward in the next Plan.
1.84 While the
worry about rapidly growing imports and the burgeoning current account deficit
appears to be somewhat misplaced, the possible risks to an otherwise rosy
outlook arise from: inflation; interest rate; and fiscal stance. In a capital-scarce economy like India, a current account surplus is symptomatic of
insufficient investment. There is clear need to enhance investment. Higher
investment is likely to result in higher imports of basic, intermediate and
capital goods and trade and current account deficit. Such a deficit, however,
is unlikely to pose a balance of payments problem as the commodity composition
of non-oil imports, with the exception of gold and silver, is biased in favour of capital and other essential inputs and is likely
to add to the export momentum in the future.
1.85 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 in
price developments. This inflation uncertainty, together with the unresolved
global macroeconomic imbalances, casts its shadow on the interest rate
A continued firming up of global interest rates beyond a point poses the risk
of dampening the domestic investment boom.
1.86 The fiscal risk,
both at the Central and State levels, arise from the argument that the fiscal
adjustment process in India
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. Expansionary fiscal
policies of the past have resulted in the present expenditure profile and any
solution for correction of the same through higher fiscal deficit is
reductionism. Though there is no inviolable penal provision under FRBMA, with a
promising economic outlook in a globalised milieu,
the nation could ill afford to falter in its fiscal resolve without adverse
consequences. The journey for sustained economic growth and stability is a long
one and quick fix solutions for higher fiscal deficit to temporarily prop up
growth through expansionary policies, albeit in increasing productive capacity,
would prove to be counterproductive. Instead, there is much scope for better
productivity in expenditure and greater growth dividend through deepening the
reform process that could harness higher savings and investment.