‘Cut subsidy flab, skip spending’

Published: 28th February 2013 09:32 AM  |   Last Updated: 28th February 2013 09:32 AM   |  A+A-

The pre-budget Economic Survey, authored by Chief Economic Adviser Raghuram Rajan, was tabled in Parliament by Finance Minister P Chidambaram on Wednesday, a day before he reads out his eighth general budget.

In his introduction to the survey, Rajan warned: “Slowdown is a wake-up call for increasing the pace of actions and reforms. Current account deficit remains a concern for the government and could be reduced through government and private sector savings.”

Curbing gold import and making oil prices market-driven would help in bridging the trade gap, the survey said. India’s foreign exchange remained stable with reserves of $295.6 billion till December last year, showing a marginal rise of $1.2 billion since last March.

Fiscal deficit at 5.3%

The survey forecast fiscal deficit at 5.3 per cent for 2013-14, opposed to Chidambaram’s proposal to lower it to 4.8 per cent. The survey added that increased fiscal consolidation and agricultural production would aid the Reserve Bank of India to cut rates.

The survey called for widening of the tax net rather than increasing taxes and privatisation of expenditure in lowering the fiscal gap. “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 said.

The view clearly showed the unlikelihood of super-rich being taxed more as was suggested by certain government quarters, including the Prime Minister’s Economic Advisory Council.

The Economic Survey also noted that the government had failed to meet its revenue collection target of `10,77,612 crore, having garnered only `6,83,345 crore; an increase of 15 per cent as against 12.2 per cent in 2011-12.

Slash Subsidies

Rajan underlined that the solution to the ongoing economic slowdown was by “shifting national spending from consumption to investment, removing the bottlenecks to investment, growth and job creation”. The survey called for slashing “distorted subsidies” and said “the danger that fiscal targets would be breached substantially become very real in the current year”.

The survey stated that reducing the subsidy bill burden had already commenced with the deregulation of diesel prices. “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,” the survey said.


The Economic Survey said that Wholesale Price Index inflation may drop between 6.2 per cent and 6.6 per cent in March. This decline in inflation would give the RBI more elbow room to make interest cuts.

The survey also emphasised that the government’s focus remained on fighting inflation by decreasing fiscal encouragement to demand and by incentivising food production. The survey said increased food inflation would remain a concern with creeping double-digit inflation in December.

It further noted that while in the last year food inflation was primarily due to rising protein food prices, in 2012-13 it was mainly due to cereal prices.

Industrial production

The survey said industrial production, which remained susceptible to domestic and external factors, could continue to be sluggish for a while longer. “Notwithstanding a pick-up in industrial growth observed in October 2012, there are mixed signals on whether the slowdown phase has bottomed out or the current sluggishness would persist a little longer,” the survey said.

While Index of Industrial Production (IIP) data showed 8.3 per cent growth in October last year, it contracted in the next two months. The survey said that number of products with negative growth dropping from 182 to 160 and optimism in the RBI’s business expectation index were positive indicators for industrial output.

Th IIP was 0.7 per cent in the April-December period this year compared to 3.7 per cent in 2011-12.

Robust FDI inflow

The survey noted that Foreign Direct Investment (FDI) showed strong growth in the services sector, increasing at the rate of 57.62 per cent compared to overall FDI inflows of 33.6 per cent in 2011-12. Foreign investment, however, dropped by 43.3 per cent to $15.85 billion from $27.93 billion in the same period last fiscal. The FDI inflows in the top five services also decreased by 9.7 per cent to USD 8.19 billion.

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