Economy remains deep in the woods

The Indian economy is in poor health and it is more or less certain that the major fiscal targets and milestones will be missed as the country may clock only 5 per cent growth as against the projected 6.7 per cent in 2012-13 Budget.

The Economic Survey 2013-14, tabled in Parliament by Finance Minister P Chidambaram on Wednesday, also made a clear case for reduction of subsidies especially on petroleum projects that would ease the swelling fiscal deficit.

To rein in the fiscal deficit and to shore up more revenues for the purse, speculations are rife that the super rich could be taxed and on inheritance.

On the issue of rising subsidy bill, the Survey said the danger that fiscal targets would be breached substantially become very real in the current year.  The government had pegged the fiscal deficit an indicator of public finances  at 5.1 per cent for the GDP  for 2012-13.  Chidambaram later revised it to 5.3 per cent keeping in view the rising expenditure and subdued revenue collection.

The FM while projecting an optimistic growth rate of 6.1 to 6.7 per cent for 2013-14 claimed that the downturn was nearing its end and the economy was showing green shoots a sign of economic revival.

The economic growth rate in the current financial year is expected to slip to decade’s low of 5 per cent from 6.2 per cent in 2011-12 and 9.3 per cent a year before that. The Survey last year had projected the growth rate for 2012-13 at 7.6 per cent.

While cautioning against raising tax rates, the Survey said that in order to augment revenue the government should make efforts to widening tax base and cutting subsidies particularly on petroleum products to reduce expenditure.

“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 pointed out that controlling the expenditure on subsidies will be crucial. The domestic prices of petroleum products particularly diesel and LPG need to be raised in line with their prices prevailing in the international market.

On inflation, the Survey said elevated food inflation would continue to remain an area of concern with inflation rate gradually inching towards double digit in December 2012. The headline inflation, it said, is expected to decline to 6.2 to 6.6 per cent by next month.

Meanwhile, the architect of the 2012-13 Economic Survey and the  chief economic advisor to government Raghuram G Rajan said, “There is a glimmer of turn around. The conditions are in place for turnaround in economy as we do not expect a global headwind like last year...But much of it we have to do domestically.”

Rajan and his team  have, however, given some brush strokes of an economic revival of sorts and have projected a higher growth of 6.1-6.7 per cent in the next fiscal beginning April 1.

Regarding the wide band in the growth projection he said  we are at the turning point and it is very difficult to predict growth at this point.