New Delhi: The pre-budget economic survey tabled before the Indian Parliament today took note of the falling 4.4-per cent gross domestic product (GDP) growth and endorsed the recommendations of the Kelkar committee reports on tax reforms. Besides these, it argued for a cut in subsidies and interest rates to tackle the growing fiscal deficit.

The survey said the deteriorating fiscal situation is a 'major challenge' and listed labour reforms, disinvestment, the overhauling of the regulatory regime including agriculture, and the removal of infrastructural bottlenecks as other priority areas to achieve an 8-per cent GDP growth.

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

The survey noted that drought would pull down the overall growth rate to 4.4 per cent this fiscal as against 5.6 per cent in 2001-02.

Growth recovery evident
The survey has not provided growth projections for the next financial year but said growth recovery is already visible. However, without fiscal consolidation there is 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, LPG and kerosene.

The survey said the institutional investor has not yet been able to utilise the opportunities for better management of risk and return using the derivative market. It suggests a need to re-examine the policy impediments for institutional participation on the derivatives market. The role of mutual funds in the economy continues to be as small as compared to that of the banks.

The derivatives trading in the country was fragmented across some exchanges, which offer commodity derivatives only and other exchanges offering equity derivatives only. At present, the currency and interest rates derivatives are not traded on exchanges, it noted.

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 is faced with serious diseconomies of scale, since it is now procuring and stocking almost three times the normal volume of grains.

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

Though inflation has been under control at a low 3-4 per cent during the year, the latest uncertainty has caused fuel price inflation to touch 6.4 per cent in mid-January 2003, the survey said, adding that in spite of the volatility in global currency markets in the aftermath of 11 September event, 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 have 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.

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, and the 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 subsidy from augmented retention prices, larger subsidies resulting from distribution of LPG and kerosene below market prices and unanticipated expenditure.

Trading places
Export growth has resulted in narrowing of trade deficit in the current fiscal so far to 13.2 per cent to $5,767 million during April-December 2002 from $6,643 million during the corresponding period of 2001, it added.

The overall trade deficit, which reflects excess of imports over exports, widened by 26.9 per cent in 2001-02 mainly because of a decline in exports. The survey lauded the government's efforts to strengthen exports of major commodities such as gems and jewellery, textiles, engineering goods, chemicals and related products and ores and minerals during the year.

On the balance of payments (BoP) situation, the survey said a medium-term BoP outlook would depend on several factors and a robust growth in exports remains one of the most critical factors in the long-term viability of the external sector.

Uneven performance of merchandise exports in the recent past, if continued, could introduce a structural weakness in the BoP in the medium term. Exports, thus, hold the key to achieving a sustainable balance between the requirements of higher growth and the imperative of ensuring viability in the external sector, the survey said.

On the import side, given the country's rising dependence on imported crude oil, the economy needs to be insulated from continuing volatility in international crude oil prices, impacting on BoP and the oil security.