The pre-Budget Economic Survey today called for investments, especially in infrastructure, to revive growth and jobs while carrying out tax and subsidy reforms for fiscal consolidation, projecting an upto 5.9 per cent GDP growth this year.
The Survey, tabled by Finance Minister Arun Jaitley in Parliament ahead of his maiden Budget tomorrow, also suggested touch measures to shore up public finances and reduce inflation.
Among the measures suggested are massive investment in infrastructure, market-linked reforms, boost to manufacturing, tax reforms and structural changes in various sectors to bring the economy back on track.
The fiscal situation of the central government is worse than it appears, given the acceleration of inflation from 2006 to 2014, the Survey said.
Moderation in inflation would help ease the monetary policy stance and revive the confidence of investors. With the global economy expected to recover moderately, particularly on account of performance in some advanced economies, the economy can look forward to better growth prospect in 2014 and beyond, it said.
The Survey acknowledged that inflation has eased but is still above comfort level.
After tabling the Survey, Jaitley told reporters that fiscal deficit for the current year will be 4.5 per cent which needs to go down further in the next two years.
In 2014-15, the Survey claims that the economy is poised to overcome the sub-5 per cent growth of GDP witnessed in the last two years which affected in particular the industrial sector.
It, however, sounded a cautious note saying agriculture production may be impacted this year if a likely El Nino torpedoes monsoon rainfall, putting pressure on food prices.
The Survey says investment can be revived by improving long term growth prospect. For this, reforms are needed on three fronts: creating a framework for sustained and low inflation, setting public finances on a sustainable path by tax and expenditure reforms and creating the legal regulatory framework for a well functioning market economy.
First, the government must ensure a low and stable inflation rate through fiscal correction, establishing a monetary policy framework, and creating a competitive national market for food.
Initiation of reforms on these fronts will reduce inflation uncertainty and restore a stable business environment. Further lower inflationary expectations would increase domestic household financial saving and make resources available for investment.
The government must put public finances on a sustainable path through tax and expenditure reforms. Tax reforms require a Goods and Services Tax (GST), Direct Taxes Code (DTC) and more
predictable tax administration.
Expenditure reforms must focus on public goods, new designs for subsidy programmes and mechanism for accountability.
"India requires the legal and regulatory frameworks for a market economy. This requires repealing the old legacy laws and creating state capacity to market reforms," it said.
The Survey said the defining challenge in India today is that of generating employment and growth. Jobs are created by firms when firms invest and grow. Hence it is important to create environment conducive for firms to invest.
The recent business cycle downturn has seen a sharp decline in investment. Reviving investment is therefore on top of the government's priorities.
As part of fiscal consolidation, raising the tax GDP ratio above the current prevailing levels is critical for sustaining the process of consolidation in the long run as compression of expenditure beyond a certain amount can be counter productive.
Calling for a new Fiscal Responsibility and Budget Management (FRBM) Act, it said, "Fresh thinking is required on a responsible fiscal policy framework... The modified act needs to take into account business cycles and to have penalties that are strong enough so that it cannot be ignored."
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