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ES underlines need to look beyond knowledge-based industries

The Economic Survey 1999-2000 today outlined fiscal consolidation as the main challenge facing the Indian economy which requires hard decisions on many fronts to achieve high economic growth and calls for increasing the pace of economic reforms.

The survey tabled in Parliament says, to sustain and accelerate the growth of economy and employment, while ensuring low inflation, economic policies must combine fiscal discipline with rapid economic reforms wherever necessary.

It outlines a strategy for achieving fiscal discipline. They include a redefinition and narrowing of government responsibilities to those functions that only government can discharge effectively.

The strategy also includes downsizing government, systematic efforts to reduce subsidies by targetting them to the poorest sections of society, a vigorous drive to divest commerical undertakings such as power utilities and transport undertakings and a concerted programme to deploy user charges for economic services rendered by government.

The strategy also involves systematic induction of information technology tools and modern management practices to enhance efficiency of governance, resource generation through transparent sale of under-utilised public properties such as land and above all determined political commitment to a truly effective expenditure management.

It notes that while specific issues and remedies differ between the central and state government and across state governments, there are several common economic themes for an effective strategy.

Quite clearly, the prospects for accelerating economic growth depend crucially on the success of managing the fiscal challenge confronting the economy. Equally clearly as long experience has shown, the challenge can only be surmounted through hard decisions on many fronts.

The gross fiscal deficit of the Centre and state governments together, which reflects the net borrowing requirements of government, had declined from 9.2 per cent of GDP in 1991 to 6.2 per cent in 1996-97. In recent years, it had climbed back to 8.5 per cent in 1998-99 and is expected to rise further in the present year.

The recently published estimates of a significant decline in domestic savings and investment in 1998-99 is primarily traceable to the burgeoning revenue deficits of the central and state governments. Similarly, the high level of real interest rates prevailing in recent times is largely due to high fiscal deficit.

A medium-term programme of fiscal consolidation will also entail systematic efforts to reverse recent declines in the ratio of tax revenues to GDP. However, tax reforms cannot and should not be synonymous with reduction in tax to GDP ratios. Sound tax reforms entail effective broadening of the tax base at all levels of government including through checking, evasion and avoidance.

Several countries have experimented with fiscal responsibility legislation as an instrumentality to assist fiscal consolidation. India should consider this option, the survey notes.

The survey says experts have identified several economic laws as redundant. A start should be made by abolishing these redundant laws. Major effort is also needed to modernise, integrate and simplify the rest of the laws, regulations and associated rules which govern and influence economic transactions.

It also calls for repeal or reform of laws and regulations in five areas: taxation, credit, rent control, urban land ceiling and labour relations. Effective public programmes implemented through local participation and accountability must become the norm for future progress.

Removal of remaining controls on agricultural exports should accompany the removal of import controls already announced over the next 15 months so that farmers can benefit from integration with world markets. The pletora of state level laws, regulation and rules, which constrain private investment and participation in agricultural marketing, storage and transportation need urgent review.

The unsustainable pricing of electric power has to be phased out sooner rather than later. The reform of the state electricity boards must be accelerated. No amount of guarantees and counter-gaurantees, can substitute for systematic application of commercial principles in the generation, transmission and distribution of power.

While regulatory authorities have been established in most infrastructure sectors, their ambit and independence often need to be strengthened.

The survey says given the severe fiscal constraints on the government, private entry into higher education will be critical to ensure that supply keeps pace with demand.

Dedicated, high-quality, long-term investment in higher education and skill generation will only occur if there is rational and stable policy framework in place. Excessive controls and interference in private education institutions could encourage fly-by-night operators.

There is an urgent need for developing a modern regulatory framework which focuses on development of standards and certification procedures, generates and disseminates information about quality of various higher education institutions and provides for independent rating and testing agencies.

Other elements of this framework would include scholarships, student loans and tax incentives with the basic context of economic pricing of higher education services. Sustained growth of knowledge-based industries requires an expanding base of economically viable and quality education.

To sustain the ongoing economic recovery in industry, the survey says it is necessary to look beyond the knowledge-based industries.

The financial sector, specially banking, needs to be strengthened. Difficult decisions have to be taken in respect of problems of weak banks, structural rigidities of the banking system and continued problem with non performing asssets.

The survey says laws in the area of industrial relations need urgent review and revision to promote greater employment in the organised industry.

The survey notes that small-scale industries have contributed greatly to the growth of the economy, employment and exports.

But to meet the challenges of the future, some of the existing policies need to be reframed to emphasise positive promotional programmes of credit supply, technological improvement and marketing assistance, while phasing out inefficent protectionist policies.

The survey says exports showed a strong recovery in 1999, growing by 12.9 per cent in April-December 1999 value in terms of the dollars. Software exports, which are not captured in the customs data, also continued to show a vigorous growth of more than 50 per cent during April-September 1999.

Despite a 57.8 per cent growth in the US dollar value of oil imports in April-December 1999, the overall import growth remained at a manageable nine per cent. As a result, the trade deficit was lower in value during April-December 1998.

Non-oil imports, however, grew by only 1.1 per cent in this period, as prices of non-fuel primary commodities were projected to fall in 1999 by over 11 per cent and unit values of manufactures by about half a per cent.

The downturn in gold and silver imports and the sharp fall in imports of capital goods also contributed to the slowing of non-oil imports.

On the demand side, private consumption recovered in 1998-99 from the slump in 1997-98, with real consumption growth doubling from 2.6 per cent in 1997-98 to 5.5 per cent in 1998-99.

Recovery in agricultural income clearly contributed to this growth as indicated by the lower saving rate in terms of household saving in physical assets. Perhaps the windfall income of government servants, which was initially saved, also started getting spent.

The growth in government consumption expenditure in real terms accelerated to 14.5 per cent in 1998-99 from 10.6 per cent in 1997-98. This provided an even greater stimulus to demand than the previous year and contributed 1.6 per cent points to the overall demand growth in 1998-99.

UNI

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