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    Economic Survey: Action speaks louder!

    The Economic Survey 2004-05 is out. Let's start with the good news first. India's GDP is expected to grow by 6.9% in 2004-05, based on provisional estimates. But like in the past, this is subject to upgrades and downgrades (last year there was an upgrade to the tune of 40 basis points or 0.4%). Moving on, instead of highlighting what happened in FY05 in detail, we would focus on what are the priorities and actions of the government?

    GDP growth...
    To start off with, this economic survey has been announced in the backdrop of healthy GDP growth, in spite of deficient South-West monsoon, higher commodity prices and the tsunami blues. While the agricultural sector is expected to grow 1.1% in light of poor monsoon in the first half that impacted kharif crop (compared to 9.6% in FY04), the manufacturing sector is likely to register 7.8% growth in FY05. As per the survey, growth in the manufacturing sector is broad-based in FY05. Though the growth of the services sector is marginally lower in FY05 than FY04, an 8.9% increase is still commendable. Services sector performance is led by better performance of trade, hotels, transport and communication sectors.

    Fiscal deficit...
    Efforts at improving the fiscal health of the States are continuing. The consolidated fiscal deficit of the centre and the states is budgeted to come down from 9.4% of GDP in 2003-04 (RE) to 7.9% in 2004-05, which is heartening. At the same time, the survey highlights the fact that the fiscal and revenue deficit have risen faster in 9mFY05, which the government hopes to make up by increased tax collections and lowering government expenditure in the last quarter. However, we would have an upward bias to the fiscal deficit in light of continued firmness in crude prices in the global markets.

    After having looked at the key areas of interest to retail investors, let's start with Issues and Priorities that the current Economic Survey has stated and how does that compare with the previous year's economic survey.

    Issues and priorities in Economic Survey - Is it consistent?
    Last year This year
    Improvement in investment climate to be nurtured Investment rate far below China and lower than the Tenth plan estimate
    Leveraging public money through public-private partnerships Leveraging public money through public-private partnerships
    Increase pubic spending to 6% of GDP (2% to 3% in the past) Education and healthcare needs significant attention
    Public investment in agriculture to be augmented More public & private investment in post-harvest facilities
    Timely institutional credit to farmers Dependence on monsoon should reduce. Irrigation is a priority
    Fillip to agro-processing sector required Simplifying entry-exit barriers for corporates
    Suitable liberalisation of FII and FDI regime Small savers yet to benefit from growth in capital markets
    Further removal of SSI reservation SSI reservation has failed to yield results.
    VAT implementation critical Indirect tax reform need to be caliberated carefully
    Reforms in tax and expenditure administration Centre and state need to improve tax administration
    Enhance energy security by augmenting the infrastructure of trans-border gas pipelines
    Need for higher foreign investment

    Overall, the issues and priorities have remained as it is, except for additional emphasis on the indirect tax reforms front. As the survey says it "since a major share of tax revenue of the Central and State Governments comes from indirect taxes, reform of such taxes needs to be calibrated carefully to balance the conflicting objectives".

    Our View:
    In the last one-year or so, besides the Budget proposals, various measures taken by the ruling government are as follows:

    1. FDI limit increases in aviation and telecom. Allowing private airlines to fly abroad.

    2. Airport infrastructure improvement and clearing the Bangalore airport project

    3. Increased autonomy in the functioning of the banking sector

    4. FDI relaxation with respect to the construction sector

    While these moves are commendable and are a step in the right direction, there is lot more to be done going forward. What are they?

    1. Growth: Yes, we, as an economy, need to grow faster to create significant employment opportunities for the populace, increasing living standards and more importantly, move towards self-sustainability over the long-term. What with one of the best natural resources in the world, talented - English speaking - cost efficient work force, time-zone advantages and the history of strong entrepreneurship.

    2. Growth and development: The populace of India, by voting out the previous government, showed the importance of boosting economic growth across all sections of the society. Even as the Indian economy continues to grow at an average rate of little over 6% per annum in the last decade, more than a quarter of the population is still under poverty line with a sagging education and healthcare system.

    If one considers the trend in organised employment in both the public and private sector, since FY94, there has actually been a decline in absolute terms amidst 6% GDP growth per annum. While this highlights the fact that productivity has improved significantly, the fact that adequate employment opportunities are not being created, outside the services sector, is an area of concern. Though one may argue that the Indian populace is younger and therefore, has better spending power, the fact that services cannot be the answer to employment generation is a known fact.

    While the previous and the current government have/are taking measures, one hopes that the pace is accelerated. In totality, the country needs to grow faster, but at the same time, it should benefit all sections of the society. Its time for the government to realize that action speaks louder than words and it should really be 'execution time'.

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