New Delhi: In order to achieve 7-8 per cent economic growth on sustained basis, the economic survey on Wednesday indicated major initiatives in the union budget to overhaul tax system, cut deficit, contain prices and boost agriculture and industry.

The survey (2003-04), tabled in parliament today said there is a clear need to overhaul the regime of tax exemptions, reduce the number of notifications, simplify procedures and move towards a paper-less and transparent administration anchored on trust.

The survey gave priority for boosting farm growth, expanding industry by 10 per cent and keeping inflation rate to about 5 per cent.

Warning that hardening global prices of oil and non-oil commodities could affect monetary conditions, it warned with fiscal deficit and signs of credit pick-up the possibility of interest rates moving northwards could not be ruled out.

To achieve higher 10 per cent industrial growth, the Survey said five constraints that needed to be tackled are:

Reservation for small scale industries,
High customs tariff,
Rigidity in labour laws,
Reaping economies of scale,
Friction in creation and closure of firms and distortions in indirect tax structure.

The foreign exchange reserves at $119 billion have provided flexibility to hasten trade reforms, it said stressing on liberalising foreign direct investment regime to make it an engine of growth as in China.

On customs duty, whose peak rates were reduced to 20 per cent in the interim budget, the survey said they should be gradually reduced to align them with that of ASEAN countries.

Apart from flexible labour laws, the Survey said it was essential to adhere to the deadline of April 1, 2005 for transiting to state-level Value Added Tax (VAT) system for rapid industrial growth.

Introduction of VAT was essential as the current regime of domestic trade taxes at the state level was characterised by distortions and inefficiencies arising from cascading and multiple rates, it said.

Implementation of VAT and recommendations of the 12^th Finance Commission would be critical determinants of fiscal improvement at the state level, it said.

To achieve the specified milestones in fiscal adjustment, there was a need for sustaining the reforms in tax and expenditure administration.