Back Mid-Year Review — Setting the economic priorities
S. Sethuraman
The Finance Ministry's Mid-Year Review, however, presents a mixed picture in the first half of 2005-06, mainly due to the poor performance in energy sectors and the fiscal and revenue deficits turning out to be higher than projected in the Budget. There is, however, overall confidence on over 7 per cent growth this year and about unlocking of the potential for higher growth, in the 8-10 per cent range, for the coming years.
It underscores the importance of higher levels of public and private investments for quality infrastructure, besides the focus on agriculture, irrigation and rural development. It also highlights the reform agenda covering the energy sector — coal and power — and the labour market where some flexibility in the application of the Industrial Relations Act is thought to promote job creation, especially in the textile industry.
In his third consecutive Budget, the Finance Minister, Mr P. Chidambaram, will certainly aim for not less than a 8 per cent growth, given the current `investment boom' in the corporate sector and gains from the ongoing liberalisation policies and measures. The Tenth Plan average growth may be close to 7 per cent, a little higher than the mid-term appraisal estimate, against the targeted 8 per cent, and this could lay the basis for a moderately ambitious Eleventh Plan. However, there has been too much focus on the growth rate, much less on how far that growth has translated into jobs and better living for the the people.
The case for 8-10 per cent growth that the Prime Minister, Dr Manmohan Singh, considers feasible rests on the assumption that it would yield more revenues for the Government to better balance its budget and enlarge public investment, especially for the social and rural sectors for which massive commitments have been indicated.
But this cannot happen over a short time-span and, meanwhile, social discontent might get even aggravated to the extent the Government does not translate its concern for the poor into something more concrete. Dr Manmohan Singh's "new deal for rural India" will remain a mirage unless the formulated employment, health and urban renewal programmes, along with Bharat Nirman, are provided substantial Budget provisions and their implementation effectively ensured.
The coming Budget can, therefore, be expected to provide a greater thrust to the social priorities of the National Common Minimum Programme than in the earlier years. The Centre's interactions with States on implementation leaves much to be desired. The Prime Minister says India cannot shy away from globalisation and has called for "tough decisions" for fiscal and other reforms, including labour market regulations, to attract larger investments in infrastructure of $150 billion over the next five years. He has lent support to calls for labour market reform to remove any disincentive to provide new employment opportunities.
It would be politically prudent for a government which depends heavily on Left support to sustain itself, to ensure that its economic policies are not seen in isolation from determined efforts to bring about a change in the present way of life for the vast majority of people, especially in the rural areas. Dr Manmohan Singh has said the art of political management lies in ensuring "longevity in office while taking difficult decisions and simultaneously in resisting populism".
India's successes in IT, the emerging dynamism in its manufacturing segment, the potential for higher growth and the huge market for consumer goods have generated a wave of robust optimism, buoyed by rosy projections by international investor firms. India's stock market has been on a dream run, scaling a new peak of over 9,000 points from 4,500, in less than 18 months.
Investments in the equity market by both foreign institutional investors and mutual funds have been at all-time high levels while the primary market is equally buoyant. With a relatively tolerable level of inflation and low interest rates, which the Finance Minister would like to continue, economic growth looks steady with manufacturing and services being the principal drivers. Although India is now called the second-most attractive destination for foreign direct investment, it has not attracted as much investment capital as it ought to have from all the policy liberalisations of yesteryears.
The Finance Minister thinks that without FDI, development of infrastructure would be constrained. Foreign investors, on the other hand, are showing greater interest in financial services (banking and insurance) and debt and equity markets. Hopefully, public-private partnership initiatives for infrastructure building will take off in the coming years with special purpose vehicles and funding mechanisms being put in place.
On fiscal policy, there are clear indications that the Budget would aim to pare the subsidy burden (food, fertilisers and POL) through increases in user charges. There will, no doubt, be a certain amount of caution in approach as major States such as West Bengal, Tamil Nadu, Kerala and Assam will go to polls by April-May at the latest. Apart from the focus on infrastructure and social programmes, more funds will be needed for irrigation, water management and food-for-work and other anti-poverty programmes.
The Finance Minister will certainly seek to raise additional resources, by expanding the tax base, and a special levy like the education cess cannot be ruled out considering the magnitude of financial commitments under NCMP. The Budget will have to make up for the `pause' in fiscal deficit reduction this year (both fiscal and revenue deficits were higher than budgeted for in the first half of the year) and , therefore, there will be greater emphasis on non-tax revenue (dividends from PSUs) andcapital receipts.
The Finance Minister is expected, in the light of the discussions with the Left parties, to go ahead with disinvestment in a few non-navratna profit-making enterprises for financing social programmes. Meanwhile, the Government would also try to get the pension reform through with whatever modifications proposed by the Left parties, so as to facilitate his budgetary exercises. A sustained hardening of international oil prices would pose threat to price stability, and there are no signs of a downtrend while demand for imported crude goes up. But domestic energy output has been lagging the demand, especially coal and electricity.
The Mid-Term Review indicates the need for urgent reforms in coal sector — investment, pricing, distribution and FDI — and giving a new thrust for accelerating power generation. Whatever macro-economic stability the country has achieved in providing growth impulses with inflation contained to 5-6 per cent over the last three years, the overall picture is not one of balanced and socially equitable advance. Any laxity in fulfilling promises contained in the National Common Minimum Programme would entail political costs for the ruling coalition, however challenging the agenda of growth, employment and social equity.
The Centre must also be in serious dialogue with the States to ensure dynamic progress in implementation of rural-urban programmes, some of which are unique in our development era. There should be effective mechanisms to safeguard against waste or leakage of resources, as is now happening with many populist schemes of State governments.
(The author is a former Chief Editor of PTI.)
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