New Delhi: India is poised to return to a phase of high growth as the government presses ahead with economic reform, helped by declining oil prices and a benign outlook for inflation, which could result in a lower interest-rate regime, according to the Economic Survey presented in Parliament on Friday.

The survey, released a day before finance minister Arun Jaitley presents his first full budget, said the economy is set to grow by 8.1-8.5% in 2015-16, up from an estimated 7.4% in the financial year ending on 31 March, and accelerate to a double-digit pace in a couple of years.

“India has reached a sweet spot—rare in the history of nations—in which it could be launched on a double digit medium-term growth trajectory which would allow the country to attain the fundamental objectives of ‘wiping every tear from every eye’," said the survey, prepared by chief economic adviser Arvind Subramanian and his team in the finance ministry.

Modelled on the International Monetary Fund’s World Economic Outlook, the survey departs structurally from its predecessors and traces the state of the economy in two volumes. Volume I discusses the outlook and prospects and volume II describes recent developments in the economy.

The survey sought to temper expectations of the so-called big-bang reforms, holding them to be an “unreasonable and infeasible standard" for evaluating the government’s reform action.

Still, the survey said the strong political mandate the government has should not be foregone and it needs to act boldly in a few areas “that signal a decisive departure from the past and that are aimed at addressing key problems such as ramping up investment, rationalizing subsidies, creating a competitive, predictable, and clean tax policy environment, and accelerating disinvestment".

Saturday’s budget announcement has been seen by some analysts and investors as a test of the Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA) government’s resolve to push reforms. The coalition took office in May after ousting the Congress-led United Progressive Alliance in the 16th general election.

Laying out a reforms agenda for the government, the survey said it needs to redraw a fiscal consolidation framework in view of the recommendations of the 14th Finance Commission, switch to public investment from public consumption, accelerate implementation of an efficient goods and services tax (GST) regime, and build a predictable and exemption-light tax system.

It also needs to finalize a monetary policy framework with the central bank, bring about reform of labour and land laws and reduce the costs of doing business.

The survey proposed liberalization of foreign direct investment in retail—something the NDA government has vehemently opposed—by holding that this could “create the possibilities for filling in the massive investment and infrastructure deficit which results in supply-chain inefficiencies".

The recommendations of the survey were not constrained by politics and were more of a wishlist for the economy, Subramanian explained at a media briefing.

Surprisingly, the survey recommended eliminating exemptions from countervailing duties (CVD) and special additional duties in the budget. Currently the CVD, which is levied to offset the excise duty imposed on domestic producers, is not applied on a whole range of imports.

“The difference not only represents the fiscal cost to the government of ₹ 40,000 crore, it also represents the negative protection in favour of foreign produced goods over domestically produced goods," the survey said.

The report said the rationale advanced for exempting many imported goods from CVD is that there is no competing domestic production.

“This argument is faulty because the absence of competing domestic production may itself be the result of not having the neutrality of incentives that the CVD creates. Domestic producers may have chosen not to enter because the playing field is not level," it argued.

The survey said inflation measured by the Consumer Price Index (CPI), which is likely to average 6.5% in 2014-15, may decline in the next fiscal year. “Our estimate for 2015-16 is for CPI inflation to be in 5.0-5.5% range. The implication is that the economy will over-perform on inflation which would clear the path for further monetary policy easing," the survey predicted.

The Reserve Bank of India signalled a shift in the monetary policy stance when it cut the repo rate by 25 basis points to 7.75% in January. One basis point is one-hundredth of a percentage point.

The survey said the outlook for the country’s external sector is the most favourable since 2008, with a $10 reduction in the price of oil expected to improve the current account balance by $9.4 billion.

Assuming a further moderation in average annual price of crude petroleum and other commodities, the current account deficit is estimated at about 1.3% of gross domestic product (GDP) for 2014-15 and less than 1% of GDP in 2015-16, the survey said.

It cautioned that muted export growth and rising non-oil, non-gold imports could affect India’s competitiveness, reflected in the appreciation of the real effective exchange rate by 8.5% since January 2014.

The survey also warned that renewed financial market volatility in response to monetary tightening by the US Federal Reserve expected this year, possible turmoil in the euro zone and a spike in oil prices posed risks to the external situation.

A likely surfeit, rather than scarcity, of foreign capital may also complicate exchange rate management.

“Reconciling the benefits of these flows with their impact on exports and the current account remains an important challenge going forward," the survey said.

Despite weak revenue collections and delayed asset sales, the survey said the government will adhere to the fiscal deficit target of 4.1% of GDP in 2014-15, helped by new excises duties on diesel and petrol, expected to yield revenue of about ₹ 20,000 crores, reduced subsidies, and expenditure compression.

The survey batted for reviewing the medium-term fiscal consolidation roadmap in light of the recommendations of the 14th Finance Commission and achieving the fiscal deficit target of 3% of GDP.

“Upcoming budget should initiate the process of expenditure control to reduce both the fiscal and revenue deficits. At the same time, the quality of expenditure needs to be shifted from consumption, by reducing subsidies, toward investment," it said.

In a report released on Friday, credit assessor India Ratings and Research said the growth and inflation targets projected by the Economic Survey were achievable and it expected the finance minister to use them in formulating the budget for the next fiscal year.

“The survey urges the government to focus on expenditure control to rein in fiscal and revenue deficit," it added. “For this to come true, the quality of expenditure must improve and subsidies must get rationalized."

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