The mid-year review of the economy for 2004-05, tabled by Finance Minister P Chidambaram in Parliament, also called for widening the tax base and reiterated the government's commitment to reduce Customs duties to Asean levels to make the Indian industry more competitive.

"A comprehensive review of the laws and procedures that underpin tax policy and administration needs to be undertaken to operationalise sound tax principles and practices," it added.

Calling for sustained efforts to further structural reforms and fiscal consolidation, the 55-page document identified insufficient investment and inadequate infrastructure as areas for focused attention.

"Enhanced investment will depend on augmentation of investible resources and creating a climate that encourages private initiative," it said.

The mid-year review also made a case for higher foreign investment, particularly in telecommunications, insurance and pension. Increasing the foreign investment ceiling in telecom and insurance has been opposed by the Left parties, key allies of the present government.

Reform of the current subsidy regime has been identified as an essential ingredient of the fiscal consolidation programme. Untargeted subsidies violate "the canons of equity", it said.

The revenue deficit at the end of September 2004 was 78.7 per cent of the Budget estimate of Rs 76,171 crore (Rs 761.71 billion) as against a maximum of 45 per cent mandated by the Fiscal Responsibility and Budget Management Act. At 38.7 per cent of the Budget estimate of Rs 1,37,407 crore (Rs 1374.07 billion), the fiscal deficit was well within the prescribed cap of 45 per cent.

The government said tax collections grew 20 per cent during April-September, as against 25 per cent assumed in the Budget, resulting in a deviation from the targets.

The shortfall was attributed to the delay in the passage of the Finance Bill and lower collections during the first half of the fiscal and post-Budget duty concessions. Also, there was an excess devolution of Rs 5,235 crore (Rs 52.35 billion) by the Centre to the states over the pro rata share based on actual collections.

On the expenditure front, there were additional demands to fund schemes like the food-for-work programme and higher fertiliser subsidy, the review said.

It said steps had been taken to ensure that the FRBM targets were met and more steps would be considered after the Twelfth Finance Commission submitted its report.

While the review painted a rosy picture of the economic scenario, it said: "Oil prices remain an important determinant of the prospects of the Indian economy."

It added that the volatility in international crude prices constituted a pressure point for imports and the trade deficit, which has been rising since 2000-01, is likely to be surpassed in the current fiscal.

Though the review said that there was no pressure on the balance of payments front, it called for appropriate strategies to minimise the downside risks from volatility of international crude prices and to reduce the degree of vulnerability of the economy to such price shocks.

It said that the move towards a market-determined prices for petroleum products would pose challenge to the government as it had a balance between judicious macro management and careful calibration.

The mid-year review also recommended higher investment in the textiles sector for capacity addition besides calling for domestic policy reforms to help the Indian textiles industry take advantage of the removal of export quotas from January 1.

It called for a need to keep food subsidy to the minimum and achieve the objective of diversification in favour of pulses and oil seeds.

"A medium term strategy including the rationalisation of the minimum support price regime, introduction of other risk mitigation measures, and strengthening research and development needs to be adopted and implemented vigorously," the review added. The government said that the co-operative credit system for agriculture was being reviewed and efforts were on to create a common market for farm produce, encourage growth in commodity futures with modern and sound regulatory architecture.