Prime Minister Manmohan Singh today warned that India has run out of fiscal space and must seriously consider pruning subsidies besides implementing next-generation reforms such as Goods and Services Tax,or risk jeopardising the growth process in the medium term.
In his New Year message to the country,Singh presented perhaps the most realistic assessment of the economy. While some reforms do attract controversy and cause nervousness,he said,one must remember that policy measures introduced 20 years ago too had caused controversy. Growth of 8 per cent-plus cannot be taken for granted,he said,pushing for reforms that can trigger rapid industrialisation and for infrastructure-building that such industrialisation needs.
With his governments big-ticket plans of FDI in retail and pension and insurance Bills stonewalled in Parliaments winter session,the prime minister said: We should remember that change is necessary for development and while we must anticipate change,and even protect the most vulnerable from ill-effects,we should not lock ourselves into a blind refusal to contemplate change.
Listing the key challenges before the country,the prime minister said these were livelihood security,economic security,energy security,ecological security and national security.
Fiscal stability was necessary for economic security and to ensure that the countrys sovereignty and self-respect are not endangered,Singh stressed. India has paid a heavy price in the past for fiscal profligacy. Fortunately we were able to overcome the problem fairly quickly and for most of the past two decades we have been able to hold our head high, he said.
Fiscal stability,however,has worsened significantly in the past three years from 2.7 per cent of GDP in 2007-08 to 5.1 per cent in 2010-11. Singh said this was mainly because we took a conscious decision to allow a larger fiscal deficit in 2009-10 in order to counter the global slowdown . However,the prime minister cautioned,like other countries that resorted to this strategy,we have run out of fiscal space.
To restore fiscal stability in the medium term,he said,the most important step was implementing the Goods and Services Tax and pruning subsidies. GST will modernise the indirect tax system,improve economic efficiency and also increase total revenues. Another important step is the phased reduction in subsidies. Some subsidies,such as food subsidies,are justifiable on social grounds and are expected to expand once the Food Security bill becomes operational. But there are other subsidies that are not and these must be contained, Singh said.
According to Singh,to achieve sustained rapid growth,the only way we can wipe out poverty in a sustainable fashion,India must do more than just halt the current slowdown (while in 2007-08,growth rate was 9.3 per cent,in 2011-12,it is likely to be 7 per cent). We need to usher in a second agricultural revolution to ensure sufficient growth in rural incomes… Our urban population is expected to grow from 380 million at present to 600 million by 2030. We must be able to provide productive jobs in the non-agricultural sector for this expanding urban population,and we must also be able to expand our urban infrastructure to deal with the expected expansion of the urban population, he said.
Stressing on education,Singh said: I firmly believe that educating our children,providing them with employable skills,while also ensuring their good health,must be our first and primary task. There is no better investment we can make in the future, he said.
To ensure energy security,the prime minister said,the country needed more investment in established sources of energy such as coal,oil,gas,hydro-electricity and nuclear power. Parallel with expanding domestic supplies,we need to promote energy efficiency, he said.
The prime minister also stressed on the need to secure ecological security. We owe it to future generations to ensure that the environment they inherit from us is at least as capable of providing economic security to them as the one we inherited from our parents.
Acknowledging that the economy had slowed down and inflation edged up,Singh said this was only a temporary phenomenon. We must not be too downcast… We must remember that downturns are followed by upturns. Indeed,they are often a test of our ability to respond to new challenges, he said.