The Hindu : Solutions missing

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Thursday, Mar 07, 2002

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Solutions missing

By Subramanian Swamy

The 2002-03 budget does not address the main problems afflicting the economy.

THE FINANCE Minister, Yashwant Sinha's latest budget has convinced the Indian public that he is clueless about how to set right the economy. The 2002-03 budget is in fact dead even before Parliament can schedule the vote for the Finance Bill. It is, to use an American phrase, a case of the chickens coming home to roost for the NDA Government. The choice of Mr. Sinha as Finance Minister was wrong because by training he is a bureaucrat (ex-IAS officer), and hence motivated not to innovate but to carry out orders. How right Rajiv Gandhi was, in retrospect, in not allowing Mr. Sinha to present a budget in 1991. His continuation as Finance Minister was one of the main reasons for the souring of relations between Chandrashekhar and Rajiv Gandhi.

The budget of 2002-03 is unique and unprecedented in that it has been condemned by all sections. Significantly, the industrialist, Mukesh Ambani, penned an article in a financial daily praising Mr. Sinha's approach which in reality is a kiss of death, because it lays bare Mr. Sinha's inspiration and power base. Others who have spoken well of the budget proposals are Government officials who cannot be expected to say anything else.

The 2002-03 budget does not address the main problems afflicting the economy. It has been rejected because the measures in the budget hurt the common person.

The main problems that afflict the economy today are: (a) a declining growth rate in GDP and a deep industrial recession, (b) a decelerating rate of employment generation and (c) stagnating exports. The main strengths of the economy today are: (i) a low inflation rate, (ii) adequate food and foreign exchange reserves, (iii) an early head start in software and information technology. While none of these strengths are due to Government policy as such (e.g., low inflation is due to low demand-induced recession), nonetheless these provide a cushion to try something bold. The main duty of a real Finance Minister therefore is to formulate a budget that squarely addresses the main problems. To raise the growth rate and end industrial recession, the essential proposals in the budget are those that raise the rate of domestic saving for there is no other way to step up the growth rate of the economy, and measures which lift the investors from the present state of gloom to one of bullishness. But Mr. Sinha has done the exact opposite! He has raised income tax through a surcharge, widened the service tax net, axed rebates, cut interest on small savings, re-imposed dividend tax, and raised the prices of sugar, LPG, PDS kerosene and urea.

Furthermore, despite the additional revenue mobilisation (of Rs.10,500 crores) fiscal deficit is set to go up steeply in the budget that will crowd out even more private investment. This means the rate of saving will fall leading to further decline in the growth rate and even deeper industrial recession. While everyone will have to tighten their belts now, Mr. Sinha has increased the allocation for tour expenses of Union Ministers by about 10 per cent, from Rs. 90.44 crores to Rs. 99.22 crores. He has also lowered the import duty on foreign liquor, reduced corporate tax rate for foreign companies from 48 to 40 per cent, made it easier to cheat tax via Mauritius by allowing FIIs to invest in companies without any sectoral limits, and liberalised capital account convertibility for NRIs.

The growth rate will be further cut because Mr. Sinha has produced a Rs. 95,377-crore surplus in the capital account of the budget by slashing development projects of the Tenth Plan in order to finance a revenue account deficit of a similar amount. I feel that the growth rate in 2002-03 will be below 4 per cent, or what economist Raj Krishna had termed the "Hindu rate of growth". What a fall, my countrymen — from Narasimha Rao to Atal Behari Vajpayee — from a 7.5 per cent growth rate to 4 per cent or less.

It is obvious that investors and industrialists will cut back on their plans. All talk by the Prime Minister of achieving an 8 per cent growth during the Tenth Plan is just so much hot air. This spiral downward of the growth rate will increase unemployment, and cut exports further. Since real interest rates have increased due to the low inflation while international interest rates have fallen, Indian industrialists will not be able to have a level-playing field to compete abroad as well as against foreign companies within India. This will adversely affect export competitiveness. But who can blame the Sangh Parivar for this dismal economic record, since their Lok Sabha count rose from 2 in 1984 to 182 in 1998 merely by promising to build a temple bereft of any kind of economic programme? And when the main Opposition party soft-pedals its critique of policies in a cartel type understanding with the ruling party, where is the accountability in Parliament for non-performance?

The key political constraint to improving the economy is that the gainers from reform policies are unorganised and cannot see any immediate benefits while the losers, the rentier class, are well entrenched in the system, well organised and feel the debit from de-regulation immediately. This is a cleft stick that can unseat any Government in a democracy, as Mr. Rao's was in 1996. Hence, what needs to be done to rejuvenate the economy is to design policies in such a way that the beneficiaries feel the benefits enough to compensate for the alienation of the losers, and the electoral interests are also safeguarded. It is for this reason that a reform-minded Finance Minister must be a politician par excellence as well, to understand and provide for the dynamics of the cleft stick.

Today, I would advocate (1) abolition of income tax and wealth tax to encourage saving and enthuse the middle class, (2) making Mumbai and Tuticorin free ports with offshore financial and banking centres to encourage investor confidence and induce FDI flow, (3) investing, with World Bank loans, in a southern river waters grid connecting the Mahanadi and the Vaigai to generate rural employment and boost agricultural production, (4) earmark taxes or bonds for infrastructure development in rural areas to enable farmers to benefit from the WTO mandated opportunities to export agricultural products such as rice, vegetables, milk, fruits and flowers and thereby receive remunerative prices, (5) A Rs. 5,000-crore venture capital fund to enable Indian professionals to open IT companies, export, receive outsourcing of services from abroad, and to integrate access to education via the Internet in towns and villages.

Can it be done with the resources available? Yes of course; but the present dispensation in power in Delhi is incapable of conceptualising such a politically-feasible programme.

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