New Delhi, Feb 25: Projecting a 7% growth in 2005-06, government`s pre-Budget Economic Survey today outlined reforms in tax & expenditure and labour laws as a priority and favoured opening up of more sectors to FDI to push up investment. The FM also indicated a phased removal of tax exemptions.
Following are the major highlights:
Inflation & Interest Rates
Govt expects to contain inflation short-medium term
High inflation putting pressure on interest rates
Strong rupee, low oil prices to help curb inflation
Containment of inflation high on govt agenda
Fall in inflation indicates flexible supply response
Interest rates continue to be moderate
Need to align banks’ lending rates with deposit rates
Trade
Govt targeting exports of USD 150 billion by 2008-09
Export growth continues to be broad-based
Balance of Payments outlook remains strong
Current account deficit seen in FY 05 after 3-year surplus
Ration of short-term over total external debt rose to 5.7% in September
Pace of external liberalisation can be accelerated
Buoyant domestic demand driving strong import growth
Mildly strengthening rupee also aiding import growth
Invisible inflows, software exports helped current account surplus
Portfolio inflows shored up capital accounts in FY 04
Current account slipping into deficit in first half of FY 05
High oil prices, non-oil items push up imports by 39% in H105
Good potential for exports in services sector
Services trade of paramount importance in the global trade matrix
Trade policy reforms have created export-friendly environment
Further productivity gains in export need deepening of reforms
Productivity gains in exports also require cut in tariffs
FDI in retail to upgrade product quality, organise sector
FDI in retail needed to invite global retail brands
Need to build on growing external strength to up export
Buoyancy in exports, investment needs to be enhanced
Industry:
Strong case to revisit FDI caps in insurance, retail
Sharp fall in interest rates fuelled industrial growth
Need for higher foreign direct, FII investment
Higher public investment in core sectors spurs growth
Growth evenly saved in Manufacturing Sector
Industrial growth reflects investors’ optimism
Rigid labour laws impede industrial growth
Procedural simplifications key to industrial growth
Must gain textile market share before 2008 when curbs on China export end
External Sector
Inflows into India seen strong as economy buoyant
External debt/GDP ratio at 17.8% end-March ’04
Ratio of short-term over total external debt rose to 5.7% in September
Emergence of current acct gap led to decrease of FX (Foreign Exchange) reserve build-up
India’s external debt USD 111.8 bln at end Mar-04 vs 105.4 bln year ago
India’s September-end external debt USD113.6 bln, up on trade-related credit
Inflow from ECBs (External Commercial Borrowings) in Apr-Sep up at USD 2.1 bln vs USD 167 mln year back
ECB approvals rose to USD 9.4 bln in Apr-Dec vs USD 4.7 bln year ago
April-Nov NRI deposits outflows USD 1.6 bln vs USD 3.6 bln inflow previous year
NRI deposit outflows also led to slower FX reserves rise in FY 05
Debt inflows main contributor to FX reserves rise this fiscal
GDP Growth
Indian economy likely to grow at 6.9% in FY 05
Likely ratcheting up of GDP growth from 6% to 7% per year
Vigorous efforts needed to achieve 7-8% GDP growth
High GDP growth unlikely with current investment level
India’s investment rate far below China, East Asia
Global growth, world trade seen slowing in 2005
Public Finance
Performance of central finances not very encouraging
Sustained tax reforms essential to meet FRBM (Fiscal Reform & Budget Management) target
Need to reconcile consolidation, tax reforms
Tax system needs more simplification, streamlining
Increasing tax rates no answer for higher revenues
Need for transparent tax enforcement mechanism
Tax laws, dispute settlement mechanism need changes
Service tax collection needs to be increased
Need to remove exemptions not conforming to tax policy
Harmonising Centre, state fiscal reforms critical
Centre, state fiscal reforms should be complementary
No fiscal consolidation without states’ participation
Introduction of state-level VAT a welcome move
National common market for goods, services needs State-Centre coordination
Expenditure reforms critical to meet FRBM targets
Cut in unproductive expenditure critical for FRBM aim
Increase in social spending imperative
Subsidies need to be targeted at the poor
Pension reforms essential for fiscal adjustment
Greater plan capital expenditure needed
Need to shift expenditure composition
Maintaining benign interest regime needed for reform
Need to remove exemptions not conforming to tax policy
FY09 FRBM target of 13.17% tax-GDP ratio daunting
Subsidy rationalization to release resources for social development programmes
Financial reforms for attracting investment in SMEs
Large-scale employment creation in construction sector
Stock Markets:
Indian stocks attractive for global diversification
FII inflows in stock market have gathered momentum
Impact cost for top Nifty stocks in 2004 1/3rd of 2001
Gross 2004 BSE, NSE turnover up 56% to 86.28 trillion rupees
FII share of total turnover 5.8% in 2004, vs 2.9% 2003
Institutional share of turnover 6.3%vs 4.6% yr ago
Around 226 bn rupees raised through 26 IPOs in 2004
335 bn rupee raised through equity offerings in 2004
NSE 3rd biggest exchange globally by number of trades
Price-earning gap between Nifty, Nifty Junior shares down
Infrastructure
Strong growth rates noticed in infrastructure sector
Overall power generation 438 bln units in April-December
Thermal, nuclear power generation grew 4.7% April-December vs 2.4% last year
Railways carried 438.36 mln tonnes of freight load so far in 2004-05
Aviation passenger traffic grew 21.8% in April-December, cargo grew 18.3%
Total phone connections projected at 250 mln by end 2007
New cell phone connections grew by 20.8% April-December vs 13.1% last year
Tele-density at 8.62 in 2004 vs 2.32 in 1999
End-users continue to face electricity shortages
Capacity addition of 5345.5 MW targeted in 2004-05
Personal computer penetration at 0.8% in India
14,279 kms of highways to be changed to 4-6 lanes
Cargo handled by big ports grew by 10.9% in April-December vs 9.9% last year
Domestic air traffic grew by 24.7% in 2004
International air traffic grew by 18% in 2004
Need to improve regulation, competition in aviation
Trans-order gas pipelines to better energy security
Industrial output shows better investment, consumption
Agriculture:
FY05 grain output seen 206 mn TNS vs 212 mn yr ago
FY05 farm credit target 1.05 trln rupee vs 80 bn FY04
FY05 farm sector growth seen at 1.1% vs 9.6% year ago
FY05 farm sector growth seen down due to deficient rain
FY05 fertiliser subsidy seen at 126.6 bn rupees, up 7%
Agriculture product prices seen falling in Jan-Mar
Food subsidy in 04-05 seen falling, 1st time in 10 years
Apr-Nov food subsidy of 176.4 bn rupee vs 200.3, down 12%
Adequate buffer stock to ensure food grain supply
Banking & Finance:
Slowdown in FX reserves growth not entirely unwelcome
RBI FX policy stood test of time, needs to continue
External sector reform can cut upward push on rupee
Need to align banks’ lending rates with deposit rates
Interest spread on loans to SMEs needs to be reasonable
Banks have not passed benefits of falling interest rates
Bank credit demand likely to increase in coming months
Growth in non-food credit impressive
Rise in net foreign exchange assets raises concerns
M3 supply is projected to expand by 14% in 2004-05
2004 bond market turnover 10.70 trillion rupees vs 15.98 trillion year ago
2004 gross Gilt issuance 1.95 trillion rupees vs 1.135 trillion year ago
Gilts reversed trend to give negative returns in 2004
Need for greater competition in banking to cut spreads
Need to move to screen-based trading in debt market
Savings rate up on higher household, corporate saving
Savings rate also up on fall in public dis-savings
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