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Feb 28, 2013, 07.49 AM IST | Source: Moneycontrol.com

Economic Survey: Govt needs to take tough steps to revive economy

The Economic Survey 2012-13 projects a gloomy picture of the economy, except for a sliver of hope that the current downturn may have run its course.

Moneycontrol Bureau

The Economic Survey 2012-13 projects a gloomy picture of the economy, except for a sliver of hope that the current downturn may have run its course. The solutions it has recommended for fixing the problems are only too well-known by now. But any possible recovery will depend on whether or not the Government can take the tough decisions, with elections barely a year away.

But most importantly, the Survey has said that the government will have figure out ways of increasing tax revenues, rather than just scrimping on expenditure to balance its account books.

On the positive side, the Survey view the medium term fiscal consolidation plan as credible, and the Government will be able to achieve its fiscal deficit target of 5.3 percent for the current year. It sees mixed signals of industrial growth having bottomed out, and that GDP is likely to grow 6.1-6.7 percent next year. Wholesale price inflation is seen between 6.2-6.7 percent by March this year, and that lower inflation would give more elbow room for the RBI to cut interest rates.

But there are a host of concerns, most prominent one being the widening trade deficit and consequently the current account deficit, which is seen at 4.6 percent for this fiscal. Revenue collection target for FY13 is likely to be significantly below target, and industry growth is still vulnerable to local and global factors. And while there is an urgent need to cut down on subsidies, food subsidy bill is set to rise because of the Food Security Bill.

The Survey sees oil subsidies as a key fiscal risk, and that the government needs to raise diesel and LPG prices in line with global rates. On the flipside, higher diesel prices could push up inflation.

There is limited room to grow exports, given adverse local and global factors. That being the case, the only way current account deficit can be kept in check is by reducing imports of gold and oil.

"Given soaring energy and transportation needs, since there seems to be little we can do to temper oil imports, gold is the component that needs to be contained to bring the CAD back to a comfort zone,” the Survey says.

And the Survey says that focusing largely on expenditure cutback may not be the right way to achieve fiscal consolidation.

"It is better to acheive fiscal consolidation partly through a higher tax-GDP ratio than merely through reduction in the expenditure to GDP ratio, in view of large unmet development needs. It is much better to achieve a higher tax-GDP ratio by broadening the base which is taxed rather than increasing marginal tax rates significantly--higher and higher tax rates impinge more and more on incentives to undertake taxable activity, while encouraging tax evasion,” the Survey says.

The Survey says revival of investment in infrastructure is one of the key challenges before the government.

"Policies to remove investment bottlenecks as well as structural reforms to encourage productive investment and its financing are essential, as is more accommodative monetary policy (lower interest rates), as inflation abates," the Survey notes.

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