"The growth slowdown in the last two years was broad based, affecting in particular the industry sector. Inflation too declined during this period, but continued to be above the comfort zone, owing primarily to the elevated level of food inflation", said the Survey for 2013-14 tabled by Finance Minister Arun Jaitley in Parliament today.
The Survey, released a day ahead of the budget for 2014-15, expects that moderation in inflation will 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 prospects in 2014-15 and beyond," it said.
As regards the downside risks, the Survey lists factors like poor monsoon, the external environment and the poor investment climate. They can have a bearing on the growth recovery, it added.
After recovering in 2009-10 and 2010-11, GDP growth slowed down to decade's low of 4.5 per cent in 2012-13. It picked up marginally to 4.7 per cent in 2013-14.
The Survey further said the measures taken by the government to improve investment climate and improve governance could push up growth to 7-8 per cent in the coming years.
The priority of the new government, the Survey said, should be to revive business sentiments "that could be at the heart of restarting the investment cycle."
Regaining growth momentum requires restoration of domestic macroeconomic balance and enhancing efficiency, it said, adding, "to this end, the emphasis of policy would have to remain on fiscal consolidation and removal of structural constraints."
"Though some measures have been initiated to this end, reversion to a growth rate of around 7-8 per cent can only occur beyond the ongoing and the next fiscal," it added.
Apart from fiscal consolidation, maintaining a stable external balance and further control of inflation, priorities for growth revival should also include streamlining of implementation procedures to restart the investment cycle and simplification of tax policy.
The Survey also made a case for repealing of archaic laws governing market access, expansion and entry/exit of firms and revamp of the dispute resolution mechanism for commercial disputes to lend greater predictability to policy, giving boost to physical infrastructure and improving productivity in agriculture.
Targeted measures by the government and RBI, it added, "have improved the external economic situation significantly, even as India remains exposed to risk on/off sentiments of investors and to policy shifts in advanced economies."
Aggregate demand (measured in terms of GDP at market prices) registered a growth of 5.0 per cent in 2013-14 as against 4.7 per cent in 2012-13 primarily due to improvement in net exports. The decline in the rate of gross fixed capital formation in 2013-14 reflects subdued business sentiments.
The investment boom in India till 2007-08 was largely due to significant increase in investment by the private corporate sector. The steep reduction in the rate of private corporate investment, leading to slowdown in overall investment rate in the economy, in recent years, point towards the need for revival of business sentiments, it added.
The Survey said the dramatic improvement in the external economic situation with the current account deficit declining to manageable levels and reduction in the fiscal deficit in 2013-14, along with some moderation in inflation, "augur well for macroeconomic stabilisation and revival of business confidence and investment."
The external sector witnessed a turnaround after the first quarter of 2013-14 and the year ended with a Current Account Deficit of 1.7 per cent of GDP as against 4.7 per cent in 2012-13.
Improvement is also observed on the fiscal front, with the fiscal deficit declining from 5.7 per cent of GDP in 2011-12 to 4.9 per cent in 2012-13 and 4.5 per cent in 2013-14.
As regards the industry, it said, the contraction in mining and quarrying for the second year in a row in 2013-14 and the negligible growth in manufacturing over the past two years, indicate the severity of structural bottlenecks.
A slowdown was also noticed in services, in particular the internal trade, transport, and storage sectors that are largely attributed to the loss of momentum in commodity-producing sectors, especially, the industry sector.
"Thus, the revival of the industrial sector, with its economy-wide linkages, is central to the revival of aggregate economic activity," the Survey said.
With regard to the farm sector, the Survey said, the agriculture and allied sectors achieved a growth of 4.7 per cent in 2013-14 compared to its long term average of around 3 per cent (between 1999-2000 and 2012-13).
Record food grains production of 264.4 million tonnes is estimated in 2013-14, as per the third Advance Estimates, indicating an increase of more than 20 million tonnes over the average production during the previous five years.
Horticulture production is estimated at 265 million tonnes in 2012-13 and for the first time has exceeded the production of food grains and oilseeds. The robustness of the agriculture and allied sector can be attributed to the steady increase in gross capital formation (GCF) in this sector.
Referring to the demographic dividend, the Survey states that India with a large and young population has a great demographic advantage. The proportion of working-age population is likely to increase from approximately 58 per cent in 2001 to more than 64 per cent 2021.
"While this provides opportunities, it also poses challenges. Policy makers have to design and execute development strategies that target this large young population," the Survey said.
"Demographic advantage is unlikely to last indefinitely. Therefore, timely action to make people healthy, educated and adequately skilled is of paramount importance," it added.
Below are some analyst views about the Economic Survey report
R. SIVAKUMAR, HEAD OF FIXED INCOME, AXIS ASSET MANAGEMENT, MUMBAI
"I think it's reasonable (regarding the GDP growth estimate). There is some evidence of an industrial growth pickup, so I don't think they are too far off the estimates.
Over the last few years we have seen the quality of expenditure deteriorate, i.e. higher amount of subsidies and lower amount of capex and planned expenditure, as well as the tax-to-GDP ratio stagnate. We will have to wait until tomorrow to see what actions are taken on these steps.
They are talking about removing or amending laws, which allow government interference of markets. These clearly reflect the new government's pro-business outlook.
From the budget what we expect to see is something where they adhere to some form of discipline, not make more announcements which they cannot achieve."
A. PRASANNA, ECONOMIST, ICICI SECURITIES PRIMARY DEALERSHIP, MUMBAI
"It's definitely reassuring to know that the finance ministry and RBI are on the same page when it comes to inflation. They are speaking in one voice about the need for inflation (CPI) targeting as a key to promoting growth of the economy,"
RUPA REGE NITSURE, CHIEF ECONOMIST, BANK OF BARODA, MUMBAI
"It is a highly realistic survey in its assessment of economic stresses and fiscal challenges. Given the unique political setting of stability that India enjoys today, it is highly probable that many of its recommendations will actually get implemented in the budget tomorrow."
NIRAKAR PRADHAN, CHIEF INVESTMENT OFFICER, FUTURE GENERALI INDIA LIFE INSURANCE, MUMBAI
"The focus on fiscal consolidation and inflation shows the government's focus on the two main risks for the Indian economy.
"Going forward, if monsoon behaves, there will be nothing to worry about. 2014/15 GDP growth pegged between 5.4 to 5.9 percent is good, as it shows we will break the trend of sub-5 percent growth rate seen over the last 2 years. One should expect GDP growth to reach about 8 percent in the next 2 years."
Following are highlights of the report:
* India needs sharp fiscal correction
* Fiscal situation of the central government is worse than it appears
* Need for subsidy reforms for fiscal consolidation
* Recommends raising tax-to-GDP ratio for fiscal consolidation
* Shortfall in revenues can be contained through better mobilisation and reforms
* External debt remains within manageable limits
* GDP growth seen at 5.4-5.9 pct in 2014/15
* Economic growth of 7-8 pct not seen before 2016/17
* Downward risk to economic growth due to poor monsoon, external factors
* Government needs to move towards low and stable inflation through fiscal consolidation
* Wholesale Price Index (WPI)inflation expected to moderate by end-2014
* Consumer Price Index (CPI) inflation showing signs of moderation
* Needs to create a competitive national market for food
BALANCE OF PAYMENTS
* Improvement in balance of payments position during late 2013-14 was swift thanks to import restrictions and economic slowdown
* Need to adjust to advanced economies' event exit from accommodative monetary policy stance
* Rationalization of subsidies such as fertilizer and food essential
* Need to shift subsidy programme from price subsidies to income support
* Government needs to move towards simple tax regime, fewer tax exemptions, single rate of goods and services tax (GST)
* GST to play vital role in indirect tax reform
* Intervention in forex market by Reserve Bank of India is behind accumulation of reserves "generally"