The Hindu : Long on rhetoric, short on resources

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Friday, Mar 14, 2003

Opinion

Opinion - Leader Page Articles

Long on rhetoric, short on resources

By S. L. Rao

This budget basically lacks an articulated conceptual framework. It tackles problems piecemeal and not in a holistic way.

THE FINANCE Minister, Jaswant Singh, had to steer the Union budget amid the treacherous shoals of the Iraq invasion, rising oil prices, monsoons made more uncertain by climate change, and an already declining world economy. One expected the budget to articulate a philosophy, show leadership, take calculated risks, and aim to steer the economy to growth. In the event, Mr. Singh has risked the economy without doing much for growth.

The budget assumes around 6.2 per cent real growth and 5 per cent inflation next year. It bases itself on low GDP growth estimates of last year's 4.4 per cent. The estimates are by the CSO that have been unreliable in the past. The budget does not attempt to improve the quality of its statistical base as suggested by the Rangarajan report.

The underlying but unarticulated philosophy behind the budget appears to be that deficits do not matter if there is growth — growth is the result of rising consumption expenditures and investment, consumption can be stimulated by lower household tax outgoes thereby increasing purchasing power, lower indirect taxes will lower prices and further stimulate demand when focussed on high multiplier goods such as automobiles (that will stimulate steel, rubber, aluminium, and many other industries). The premise continues that this will further stimulate the economy, and that the Government's investment in infrastructure is important to kickstart growth in basic industries. Mr. Singh has kept his promise to put money in the middle-class housewife's purse by reducing direct tax liabilities. By lowering excise duties, he has also reduced the prices of some apparently high multiplier consumer goods such as cars and air conditioners. By continuing with lowering interest rates, he has made bank financing for such purchases even cheaper. We do not yet have the tools to estimate how much this will stimulate the economy and how long it will take for the multiplier effects to work. But, given the relatively low share of manufactured consumer goods in the GDP, it cannot be high.

The implicit philosophy is in some contrast to the "reforms" of the last decade. So far, the attention was on macroeconomic stability (lower Government deficits, lower internal debt to GDP, reduced external short-term borrowings, greater balance on current account in the balance of payments, etc.), opening up the economy to competition, making taxation and interest rates competitive with other countries, moving the Government out of business, and improving efficiency and productivity. Some of these such as opening up the economy through further lowering of import duties and more sectors to more foreign investment, reducing taxation and interest rates, remain in focus. But controlling deficits by limiting Government expenditures appears to have been abandoned. Mr. Jaswant Singh's predecessors did not succeed in controlling expenditures and even Manmohan Singh could only limit investment expenditures, not current expenditures (on staff, subsidies, etc). But the Geethakrishnan report on expenditure reform remains unimplemented.

Falling investment growth has been the challenge of the previous decade. The falling rate of growth in capital formation, declining public investment, especially in agriculture, falling growth of capital formation in industry, particularly manufacturing, have led to poor employment growth and declining inflation largely due to reduced economic activity. The climax was that savings last year were higher than investment. This is alarming. This budget hopes for capital formation to rise in manufacturing because of greater demand. It expects the core sector to grow because of "public-private" investment in infrastructure — roads, airports, ports and railways. But it has provided very little money and expects details for such partnership to be developed soon. It banks on a BOT (build, operate and transfer) process to achieve private sector investment. This has not been effective for years. Given the extreme lethargy of the Government in pursuing innovative methods, how is such a process to be designed and made effective soon enough to stimulate the economy?

Despite contributing only 25 per cent to GDP, agriculture is a major driver of the economy. With over 60 per cent of India being rural and with low incomes and savings, it has a disproportionately high effect on consumption. There is a small provision for investment in agriculture, and that is not in the areas that will benefit crop agriculture, which is where there has been low investment for years in storage, etc.

The tax proposals are partially sensible. For example, the raising of exemptions is wise for elections, meeting the budget's philosophy and for avoiding sudden reduction in purchasing power. The resumption of a dividend distribution tax amounts, by the Minister's own earlier admission, to double taxation. The abolition of long-term capital gains tax is welcome to investors but unfair in treating unearned gains differently from incomes from employment. The attempt to give some protection to the aged from falling interest rates has led to another pitfall. A guaranteed income at 9 per cent with shortfalls to be made good by the Government will put future Governments in the same difficulty as with UTI's guaranteed income schemes. The Government should have learnt from other subsidy schemes and capped the number of beneficiaries and the amount of benefit by eligibility only for those who are 55 or older on April 1, 2003. The health insurance scheme is innovative, but is there an actuarial valuation and which insurance companies will enter it? The idea of a Pension Regulator is sound but the Finance Minister has succumbed to manoeuvring from the bureaucracy by creating another regulator and post-retirement jobs.

The budget was also an occasion to signal commitment to reforms by standardising the laws relating to all regulators. They must all function transparently, consult interested groups, be responsible for licensing, regulate tariffs, and be structured to be truly independent. The independent regulatory body proposed for oil and gas is a good example of an emasculated regulator. Why should all regulators not have similar rules and functions? The SEBI also should be independent of the Finance Ministry, appeals should not be to the Finance Secretary and appointments should not be at the discretion of the Ministry.

This budget basically lacks an articulated conceptual framework. It tackles problems piecemeal and not in a holistic way. It is retrogressive in selectively cutting duties for some industries. It is primarily focussed on stimulating the purchasing power of urban salary earnersIts investment proposals are confused and provide for little Government funding. Its lack of attention to expenditure reduction and improving efficiency is its worst feature. In a volatile economic situation as we are in, this is a flaw that exposes the economy to excessive risk.

This is not a "dream" budget. It is a well-meaning attempt by a powerful amateur with pre-conceived ideas on what is good for the economy. It has the prospect of escalating deficits; fuelling further inflation, increasing interest rates, poor agricultural growth, weak infrastructure regulation and investment, and poor growth.

(The writer is a former Director-General, National Council for Applied Economic Research, New Delhi.)

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