S. Sethuraman

The Budget, despite its limitations, has been welcomed for the primacy it gives for equity while industry also gives credit to Mr P. Chidambaram for what he could do in the circumstances. But the question is, how effective this Government will be in implementing the programmes for creation of productive assets and for reaching the basic services to the targeted poor, says S. Sethuraman.

There is a strong thrust in the Budget to bring Rural India into the economic mainstream.

THE Finance Minister, Mr P. Chidambaram, may have done a commendable job with his 2004-05 Budget, designed as a pace-setter for advancing social goals in the pursuit of economic growth, as postulated in the National Common Minimum Programme of the United Progressive Alliance Government, taken by him as the "guiding light". In the first Budget of the new dispensation, Mr Chidambaram has attempted to strike a balance between the requirements for sustained growth of the economy, through investments and institutional reforms, and the imperatives of honouring the commitments to the people through the NCMP without sacrificing fiscal prudence. Yet, he may have belied expectations of more spectacular thrusts in agriculture and rural development, on the one hand, and of those who looked for major changes in the tax system and accelerated reform policies.

Overall, the Budget, despite its limitations, has been welcomed for the primacy it gives equity — not merely as a by-product of growth — while industry also gives credit to Mr Chidambaram for what he could do in the circumstances in terms of sustaining growth momentum and promoting investments. Some sectionsmay not be happy with certain duty changes (such as steel, for instance), apart from the vociferous Left which is opposed to liberalisation, in general, and privatisation and rise in foreign direct investment equity, in particular. The stock market sentiment is upset by the proposed turnover tax on transactions in securities, however small the rate (0.15 per cent of the value of security).

The Finance Minister's constraints, both political and fiscal, cannot be overlooked. Essentially, the Budget has to reflect as much as possible the social priorities of the NCMP and give a start to as many programmes as possible within resources that can be mobilised for the immediate, even as the reconstituted Planning Commission goes through an elaborate exercise of recasting the Tenth Plan, now in its third year, in line with the objectives of the NCMP, and comes up with final allocations. With only six months to go this year once Parliament votes the Budget, the Finance Minister has apparently reserved several major initiatives, including tax reform, till next year. Also, in stepping up public investments, he has to work within a medium-term fiscal framework, enjoined by the Fiscal Responsibility and Budget Management Act (FRBM) 2003.

Mr Chidambaram did not discard the Interim Budget presented by his predecessor in February altogether but built on those fiscal aggregates, strengthening many of the ongoing programmes which accord with priorities of the NCMP and supplementing them with new ones with a block provision of Rs 10,000 crore, raising the Centre's Plan expenditure by Rs 25,000 crore over the revised estimates of last year.

A Food for Work programme in 150 districts classified as backward and a massive scheme to repair, renovate and restore some 500,000 water bodies over a period are , among the notable measures.

The Finance Minister has revived the Rural Infrastructure Development Fund, which will have a corpus of Rs 8,000 crore provided through Nabard. But the big question is how effective this Government will be in implementing the programmes for creation of productive assets and for reaching the basic services to the targeted poor.

The Government has set before itself a five-year road map to achieve the objectives of the NCMP, which include maintaining a 7-8 per cent growth rate, universal access to basic education and health, generation of employment in agriculture, manufacturing and services, promoting investments — public and private, domestic and foreign — in all sectors of the economy, and expanding infrastructure. These would be achieved while continuing the reform process to achieve mutually reinforcing objectives of growth, stability and equity, according to the Finance Minister. He has set down stiff targets of 2.5 per cent of GDP as revenue deficit, from 3.5 per cent in 2003-04, and of 4.4 per cent (4.8 per cent) as fiscal deficit.

The Budget assumes growth of GDP at 12 per cent at current prices and with inflation already crossing 6 per cent, mainly due to oil prices, a 7-8 per cent growth must be discounted. There are misgivings that the Budget would give a further price-push with its two per cent education cess on direct and indirect taxes, rise in service tax and excise duty revisions.

While only a modest Rs 2,000 crore is expected from direct tax changes, the estimated revenue receipts show a huge increase of Rs 46,000 crore (25 per cent increase in income-tax and 40 per cent in corporate tax receipts).

The Finance Minister does not agree it is unrealistic as, besides the education cess and the service tax rate increase, he expects to recover a substantial part of the large arrears in direct and indirect taxes. But it is clear from the macroeconomic framework statement presented to Parliament that the fiscal adjustment is anchored on "a sustained benign interest rate regime and stability in prices".

India may not be able to insulate itself from global interest rate changes in the offing. The US Fed has already revised the short-term interest rates by one quarter of one per cent and is ready to act on a measured pace if prices continue on an uptrend. His skillful exercise notwithstanding, Mr Chidambaram will still be required to make a hard sell of the Budget. He is setting up an Investment Commission to secure investments by domestic and foreign businesses and has proposed higher ceilings for FDI in telecom from 49 to 74 per cent, in civil aviation from 40 to 49 per cent and in insurance from 26 to 49 per cent, sectors which need a large infusion of capital.

Opposition to this from the Left was predictable and the Prime Minister and Finance Minister must be hopeful of persuading the Communist parties, and the trade unions behind , to see the logic of the move when the country needs more investments and nothing is bartered away to foreign interests. Mr Chidambaram says it does not make much difference in control or management whether the foreign holding is only 26 per cent or 49 per cent.

In the already-liberalised telecom sector, where public and private companies operate, some companies have already 74 per cent (49 per cent of foreign investor and 25 per cent through a local partner).

The Finance Minister has, however, been cautious with regard to disinvestment and has assumed only Rs 4,000 crore as yield this year by divesting 5 per cent of equity in NTPC and a few other cases, after the record Rs 14,500 crore raised by this route by the NDA Government last year.

Committed to a selective approach to disinvestment/privatisation, having ruled out privatisation of profit-making enterprises, the Government is establishing a Board for Reconstruction of Public Sector Enterprises to make recommendations on disinvestment.

Resources raised would be for meeting the social needs, he said. Buoyancy in tax revenues has helped to improve the tax-GDP ratio which is projected at 10.2 per cent of GDP and the medium-term fiscal policy statement of Government says it would go up to 11.1 per cent next year and 12.1 per cent in 2006-07. A steady increase in tax revenues as a proportion of GDP has become vital for the targeted reductions in fiscal deficits through 2009.

From the Budget documents, it is clear that Mr Chidambaram faces tougher challenges next year in giving greater substance to the NCMP programmes, especially employment, undertaking major tax reforms, both direct and indirect, to meet rising revenue needs for public investment, restructuring subsidies so as to target them to the needy, preparing the transition to VAT on a national basis, integrating tax on goods and services, and giving effect to the Twelfth Finance Commission's recommendations on Centre-State fiscal transfers for the years 2005-10. A rough road ahead for the Finance Minister.

(The author, a former Chief Editor of PTI, is a New Delhi-based freelance writer.)

© Copyright 2000 - 2009 The Hindu Business Line