Will this Budget be any better?

By Subramanian Swamy

JUST AS I had predicted in these columns last year, the 2000-01 Union Budget has flopped. The estimated 2000-01 growth rate, at 5.8 per cent, is far below the 1992-97 trend rate of 7 per cent, and much less than the Prime Minister's King Canute-like announcement that he had directed the Finance Minister to achieve a 9 per cent growth in GDP. In fact, this year's 5.8 per cent growth rate is less than the level attained for any year since 1991 except during the ``dream budget'' of 1997-98, when the Indian economy had retarded to a 5 per cent growth rate.

Besides, inflation, measured by the wholesale price index, is already at 8.5 per cent and the capital goods sector has virtually collapsed. The domestic savings rate is the lowest of the decade. In fact, the last three Budgets of Mr. Yashwant Sinha have all been barren bureaucratic exercises. Mr. Sinha through the three Budgets of 1998-2001 has led the Indian economy downhill, so far down that it will require much imaginative and dynamic policy initiatives, which he is incapable of, to recover the reform momentum of the 1992-97 period. Four facts stand out to show the morass that the economy is in at the moment.

First, the estimated growth rate in 2000-01 is not only the lowest, but it represents the third year of deceleration of the economy. In 1998-99, the growth rate was 6.8 per cent. In 1999- 2000, it fell to 6.4 per cent. This year, 2000-01, it has regressed further to 5.8 per cent. And this decline, according to the latest RBI's Currency and Finance Report, is ``in agriculture, mining & manufacturing, construction, insurance, and services'', i.e., all round deterioration. India's fundamental economic problems - of lifting the 300 million people from below the poverty line (BPL) and of minimising the huge unemployment backlog in the work force - cannot be solved within the next decade unless the GDP growth rate is stepped up to 10 per cent (see my ``India's Economic Performance and Reforms'', July 2000, Konark Publications). During the Narasimha Rao years, this 10 per cent growth rate target was within striking distance. But two Finance Ministers, Mr. P. Chidambaram and Mr. Sinha, have since successively put the economy in reverse gear, and the target beyond reach.

Second, to sustain a growth rate of 10 per cent an investment rate of 35 per cent, if efficiently deployed, is required. But during the last three years, the rate of domestic saving, which provides over 98 per cent of the nation's total investment funds, has steadily dropped. It now stands at a mere 21 per cent. Foreign Direct Investment (FDI) has also dropped from $ 3.6 billion in early 1998 to $ 2.2 billion last year to just $ 2 billion this year (China has been receiving an average of $ 40 billion a year for the last ten years). The current account deficit in the balance of payment has soared by 33 per cent to an annual equivalent of $ 8 billion. The rupee/dollar rate has also depreciated from Rs. 37 to the dollar in 1998 to Rs. 45 today (while China has maintained a steady 8 yuan to the dollar for the last decade). The BSE's sensex which was 5001 on March 31 last, has dipped to 4200 and below now.

Third, agriculture, which employs even today over 70 per cent of the work force, has had the twin problems of declining growth rates (now down to 1 per cent) and of lower prices, compounded by higher prices of all industrial inputs such as fertilizer, diesel and power. Lower agricultural prices are due to WTO-mandated lower import tariffs, which came upon us while the Government slept or was otherwise busy demolishing a mosque or building a temple. Even though Indian rice, milk, vegetables, fruits and flowers are the cheapest in the world, our agriculture lacks the necessary packaging and transport infrastructure to take advantage of the double- edged WTO and export these products. Instead, we are today drinking Australian orange juice and eating New Zealand apples, while our own fruits are not in the field for lack of marketability.

Fourth, the Budget arithmetic is in a complete mess. India now has the ignominy of a capital account surplus of Rs. 80,000 crores to finance the revenue account deficit of an equal amount, instead of the other way around as is common in progressive economies. This means development projects such as in infrastructure and manufacturing have been cut to release funds to sustain interest payments, Defence and Government salary bills on the revenue account. Furthermore, despite the hot air about ``downsizing government'', our bureaucrat Finance Minister has a actually increased the outlay on Government administration. Indian Government expenditure is the least cost-effective in the democratic world. The expense, for example, on maintaining an official car for the babu, in terms of driver's pay, fuel payments etc., is Rs.50,000 a month while a similiarly maintained better quality rented car, hired on a need basis, costs just Rs. 11,000 a month.

Briefly, I advocate here four crucial steps to restore the economy. First, make the Indian investing public (i.e., those with savings accounts, share owners, or entrepreneurs) happy and enthusiastic about the future, by abolishing personal income tax; making corporate expenditures on HEW (health, education and welfare) of workers as tax deductible; reduce the prime lending rate (PLR) to six per cent without cutting the deposit rate on savings account (i.e., subsidise and tell IMF to go to hell on fiscal deficit); and downsize government by shifting on a war footing to e-governance. If we take these steps then Indian companies can take on multinational corporations within India in any competition today, while the investing public will create a bullish environment and raise the rate of investment.

Second, India must fight in the WTO to make labour mobility internationally as free as capital mobility. Today it is hampered by immigration laws of the developed countries. This mobility will enable Indian companies to compete abroad for projects. Also, we must allow FDI freely but curb mergers and acquisitions (M&A); we should not renege on agreements (e.g., on Enron) however foolishly contracted, in order to sustain foreign investor confidence; and, finally, make Mumbai, Kochi and Tuticorin free ports, a la Hong Kong.

Third, provide aggressive back-up financial and organisational support for exports of agro-products, textiles services and IT know-how, in which India enjoys substantial comparative advantage. The dismantling in Europe and the U.S. of quantitative restrictions (QRs) after April 2001 on WTO mandate, opens for India a tremendous opportunity. Fourth, enact a tight anti- monopolies U.S. type Anti-Trust Act to crack down on private sector conglomerates. Oligarchy is dangerous for Indian democracy, and patriots have to fight it now with effective legislation.

But can Mr. Sinha even dare to question the hold of vested interests or implement such a programme as above? He will have to retire (to Mauritius?) the next day if he tried. With the present dispensation in power and the opposition in a cosy cocoon, we shall have to wait for a financial earthquake before the nation can get its act together and rebuild the economy. And that, hopefully, is not far off judging by the current economic trends.

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