Says the Survey: ``The impact of the fifth pay commission and its aftermath on the revenue deficits of the centre, states and local bodies lends urgency to the need to downsize government.'' In addition, it suggests the gradual elimination of low-priority expenditure and non-targeted subsidies, removal of financial sector controls and an easing of interest rates.

The Survey, tabled in Parliament on Wednesday, calls for initiating a "second generation" of economic reforms in areas like factor markets, public sector, government and other public institutions, legal systems, labour laws, state level policies and procedures and in critical sectors like infrastructure, agriculture, education, R&D andagricultural/rural extension.

In a significant observation, the Survey says that the economic situation today is not significantly better than in 1991-92. It, therefore, makes a case for building a political consensus for imposing constitutional and administrative measures to check the fiscal deficit, revenue deficit, unproductive expenditure and unsustainable subsidies.

It suggests that long-term fiscal sustainability would require bringing down the primary deficit to below zero. For the centre and states together, the primary deficit is estimated at 2.4 per cent of GDP in 1997-98 (revised estimate) with little prospect of improvement in 1998-99. A reduction in the primary deficit to zero would, therefore, require a reduction in the fiscal deficit-GDP ratio by at least 2.4 per cent.

The fiscal deficit estimate for this year, based on the new national accounting norms, would be 5.1 per cent of GDP as against the 5.6 per cent mentioned in the budget. However, the Survey is clearly unimpressed andemphasises that "it is unlikely that the year-end fiscal deficit would be contained within the budgeted amount."

The Survey has also stressed that fiscal consolidation is necessary for containing inflation, reducing interest rates, promoting investment and growth, and fostering reasonable stability in the financial system and foreign exchange markets.

Making a case for downsizing the government, the Survey says that fiscal reforms must be accompanied by determined efforts to augment revenue mobilisation through base broadening, improved administration and other means. The decline in the tax-GDP ratio of recent years must be reversed.

According to the Survey, "it is imperative to strive towards strict containment and prioritisation of public expenditure. Besides, it is essential that expenditure, subsidies, and transfers reach the intended beneficiaries, by targeting subsidies to the poor and making the rest pay at least the operational cost of public services and phasing out programmes which do notserve any social objective or purpose."

It calls for removal/dismantling of distortionary policies (eg. general subsidies) that encourage overuse of natural resources. It adds that emphasis should be on policies that help the poor and increase their access to services like drinking water, sanitation and health. Accordingly, it argues for greater use of economic incentives like prices and taxes to be adopted to harmonise private and social interests towards protection of the environment.

The Survey further suggests a relaxation of investment controls, especially in infrastructure areas, a relook at small sector reservation, replacement of quantitative restrictions by fiscal measures and removal of import and export controls in the agriculture sector. Also, according to Survey, the remaining price and distribution controls be eliminated. At the state level this must be preceded by a major effort to identify such controls.

Similarly, the Survey made a case for doing away with controls in the financialsector which remain embedded in the laws, rules and regulations, norms and procedures.

The Survey primarily blames the external environment, including the relative appreciation of the rupee in real terms, for subdued export growth and suggested that export production needed to be transformed to remove the controls and constraints facing exporters. This would require a comprehensive re-examination of labour laws and small sector reservation as applicable to exporters with a view to bringing them on a par with successful exporting countries like China.

The Survey also warns that if these policy measures, along with fiscal correction, are not taken, the balance of payments could again come under pressure.

The Survey made a case for lowering interest rates by bringing down intermediation costs, especially in the case of public sector banks. It also favours innovative financing for funding the infrastructure sector.

It was further emphasised that better export promotion policies required a clearrecognition that high import tariffs discourage exports, while lower tariffs enhance the relative profitability of exports. Greater liberalisation of trade in agriculture was also desirable for promoting exports.

The Survey calls for radical reforms in the areas of infrastructure services, agriculture and factor markets to initiate a virtuous cycle of export growth, employment generation and economic growth. It says that completion of insurance and pension fund reforms is merely a first step in creating a strong and vibrant long-term debt market. Other factor markets areas such as labour, land, natural resources and corporate management needed to be tackled seriously.

Projecting a low 3.7 per cent industrial and 2.6 per cent export growth, the Survey says GDP growth is likely to pick up to 5.8 per cent this financial year from 5 per cent in the previous year mainly because of the rebound in farm production which would grow by 5.3 per cent.

The Survey also notes that the country's balance of paymentssituation was `moderately comfortable' despite the turbulent international financial environment. But for the exceptional inflows of resurgent India bonds (rib) at over $4 billion, the net capital inflows would have been lower as both FDI and portfolio investments declined. Both the current account deficit and trade deficit have widened as the import growth rate contracted marginally and exports slumped.