INDIA'S ECONOMIC SURVEY FOCUSES ON GROWTH AND FISCAL

UNCLAS SECTION 01 OF 02 NEW DELHI 001392

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E.O. 12958: N/A
TAGS: ECON EAGR EAIR ECPS EFIN EINV EMIN ENRG EPET ETRD
BEXP, KBIO, KIPR, KWMN, IN
SUBJECT: INDIA'S ECONOMIC SURVEY FOCUSES ON GROWTH AND FISCAL
CONSOLIDATION, AHEAD OF BUDGET


1. (U) Summary: The Economic Survey for India's Fiscal Year (IFY)
2008-09 (4/1/2008 to 3/31/2009) presented by Finance Minister Pranab
Mukherjee in India's Parliament on July 2 paints a resilient picture
of the Indian economy. The Survey sees a 'U shaped' recovery for
growth in IFY 2009-10 (4/1/2009 to 3/31/2010) with GDP growth to be
as high as 7.75%, if the global economy turns up by September 2009,
and a reasonable growth of 6.25% if the global recession drags on.
The survey proposes an ambitious list of reform measures - some of
which have been suggested in the past - including a 49% foreign
direct investment (FDI) cap in insurance, allowing "multi-format"
retail starting with food retail, and restructuring expensive
subsidies. Some of these measures were announced in the Budget
Speech given by Finance Minister Pranab Mukherjee on July 6 (more in
detail septel). End Summary.

India's Growth Revival
--------------


2. (U) India's Economic Survey for IFY 2008-09, presented by Finance
Minister Pranab Mukherjee in Parliament on July 2, states that the
Indian economy withstood the adverse global conditions and grew by
6.7% in IFY 2008-09 versus 9.0% IFY 2007-08. Agriculture growth
moderated to 1.6% in IFY 2008-09 from 4.9% in the previous year,
mainly on account of the high base effect. Industry grew by 2.4% in
IFY 2008-09 versus 8.5% in IFY 2007-08, led by weaker exports and
lower domestic demand. Even so, India continues to retain its
position as a preferred destination for foreign investments.
Foreign direct investment (FDI) flows to India grew 85% in 2008 to
US$46.5 billion from US$25.1 billion in 2007. On the back of a
narrowing trade deficit as well as continued resilience in
remittance flows, the Survey expects a current account surplus of
0.3% to 2.8% of GDP in IFY 2009-10, assuming crude prices of
US$70-80 per barrel.


3. (U) The Survey asserts that reviving growth is the key priority
for ensuring inclusive growth and generating revenues needed for
meeting the social welfare objectives. The Survey forecasts real
GDP for IFY 2009-10 to reach between 6.25% to -7.75%. The speed
with which the Indian economy returns to a high growth path depends
on the revival of the global economy, particularly the U.S. economy
and the GOI's ability to push policy reforms. In the event of a
more prolonged external economic downturn, with the revival of the
global economy/US economy being delayed until 2010, the Survey
projects that Indian growth would moderate to the lower end of the
range. The economy is poised for a U-shaped recovery, with the last
two quarters of FY 2008-09 (October 2008-March 2009) and the first
two quarters of FY 2009-10 (April-September 2009) forming a trough.
The Survey assumes a normal monsoon, leading to 3% growth in the
farm sector. The Survey highlights underlying domestic strengths -
including the high contribution of services, strong rural incomes,
and a rising savings rate, thrust for infrastructure, and buoyancy
in foreign direct investment - as key factors supporting growth.

Fiscal Consolidation
--------------


4. (U) India's fiscal deficit for IFY 2008-09 slipped sharply to
6.7% of GDP in IFY 2008-09 from the budget target of 2.5%. The
slippage was largely due to falling revenues, implementation of the
Sixth Pay Commission Award, the Agriculture Debt Relief Scheme, as
well as to the stimulus packages announced between December 2008 and
February 2009. The Survey emphasizes that the GOI should announce
reform measures to restore the Center's fiscal deficit to 3% of GDP
as per the Fiscal Responsibility and Budget Management Act target.
Tax and expenditure policies need to be restructured for improving
fiscal transparency to achieve fiscal consolidation. It calls for
the abolishment of the fringe benefit tax, securities transaction
tax and the commodities transaction tax. The Survey encourages the
government to introduce a new Income Tax Code, as well as implement
the Goods and Service Tax (GST) by April 2010.


5. (U) The Survey stresses 'revitalizing' the disinvestment program
to generate Rs 250 billion (roughly US$5 billion) per year as a
feasible way to lower the deficit. Other fiscal measures which the

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Survey says could reduce the fiscal deficit include streamlining
oil, food and fertilizer subsidies to reduce leakages and the
possibility of direct cash transfers to targeted groups. The Survey
suggests that a new cooking gas subsidy of a maximum of 6-8
cylinders per annum per household should be given and that the
kerosene supply-subsidy should be phased out by ensuring that every
rural household (without electricity and cooking gas connection) has
a solar cooker and solar lantern. Further, the Survey recommends
converting the fertilizer subsidy from a part-producer subsidy to a
wholly farmer-user nutrient related subsidy, with freedom for
producers to set prices of formulations with different mixes of
nutrients.

Inflation Still a Concern
--------------


6. (U) Wholesale price index (WPI) inflation was very high for much
of last year, peaking at nearly 13% in August 2008, followed by
sharp falls after that. The average annual WPI inflation for the
year ending March 31, 2009 was 8.4%. WPI inflation is currently in
the negative territory, having fallen to -0.13% for the week ended
June 20. On the other hand, the consumer price index (CPI)
continues to remain high (8.6% in May 2009),largely due to food
price pressures. The food group has a high weight of 46% in the CPI
for industrial workers and 69% in the CPI for agricultural workers.
The Survey points out that the supply chain is unable to cope with
accelerating growth in income and consumer demand and it has raised
concerns of another inflationary cycle. The Survey suggests that
the government should increase production of food items to increase
supply and reduce food inflation. The discrepancy between the CPI
and WPI could be resolved by land and real-estate sector reforms,
strengthening the public transport system, building food supply
chains and an updated WPI.

Call for Reforms
--------------


7. (U) The survey calls for wide ranging reforms to boost
investments and revive industrial growth. Some of the new reforms
include allowing for private sector entry into coal mining and an
amendment to the Atomic Energy Act permitting foreign participation
in the nuclear power sector. The Survey advocates FDI in retail,
calling for FDI in "multi-format" retailing, especially food
retailing, where foreign investment can help create cold supply
chains. It also supports raising the FDI cap in defense, insurance
and banking sectors. The Survey suggests early passage of the
Pensions Fund Regulatory and Development Authority bill for giving
statutory power to the regulator as well as liberalization of the
spot and futures currency markets of India.

Comment
--------------


8. (U) Much like last year, the Economic Survey has outlined a
number of encouraging, even ambitious, reform initiatives. Also
like last year, implementation is key. As a precursor to the
introduction of the budget, the Survey has sketched reasonable
growth expectations and emphasized the need for reforms across
government delivery of services. It acknowledges that the country's
growth in recent years has benefited from a benign global economy.
Now that global growth is forecast to shrink, India can no longer
afford to delay improvements in education, health, efficient subsidy
delivery, and infrastructure. The Survey, a product of the Ministry
of Finance, spells that out and the reforms needed to return India
to its potential high growth path. It remains to be seen whether
there is sufficient agreement within the UPA coalition to enact
these reforms.

BURLEIGH