The Hindu Business Line : Mini-Budget: Fuelling the `feel-good' factor

The measures announced by the Finance Minister, Mr Jaswant Singh, are intended to give a further thrust to the `feel-good' factor and ensure that the growth momentum of the economy is sustained over the medium and long term. They also carry a message that the agenda of economic reforms is not to be delayed because of the impending general elections, says S. D. Naik.

SENDING out a clear signal of early General Elections, the Finance Minister, Mr Jaswant Singh, unveiled a Mini-Budget in two parts on January 8 and 9. While Part-I contained a host of concessions aimed at luring the middle-class, BJP's traditional vote-bank, Part-II has targeted rural India, the SSI sector and senior citizens. While some analysts and editorial writers have rightly questioned the timing of the far-reaching announcements, there is no denying that some, if not all, the changes have economic merit.

The BJP-led NDA Government's political strategy is clear. It wants to advance the poll dates to take advantage of the favourable climate created by the electoral victories in three States in recent elections, the undoubted success of the Government on foreign policy front, particularly in improving relations with China and Pakistan, and the economic buoyancy seen this year. Thanks to the recovery driven largely by good monsoon, the GDP growth has surged by a record 8.4 per cent during the second quarter (July-September) of this fiscal and the overall GDP growth for 2003-04 has been projected at over 7 per cent; it may even touch per cent.

Evidently, the measures now announced by Mr Jaswant Singh are intended to give a further thrust to the `feel-good' factor and ensure that the growth momentum of the economy is sustained over the medium and long term. They also carry a message that the agenda of economic reforms is not to be delayed because of the impending General Elections.

The most significant announcement is respect of Customs duty changes is the reduction in the peak rate of duty from 25 per cent to 20 per cent along with the abolition of four per cent special additional duty (SAD). This is in keeping with the WTO requirements and the roadmap already decided earlier to bring down the duties in a phased manner to the levels prevailing in the member countries of the ASEAN.

The other significant changes in the duty structure include reduction of import duty on project imports with a minimum investment of Rs 5 crore to 10 per cent from 25 per cent, reduction of duty on power transmission and distribution equipment from 25 per cent to 10 per cent, lowering of import duty on life-saving drugs, formulations and medical equipment to 5 per cent, reduction of duty on import of raw materials for making electronic components from 5-15 per cent to 0-5 per cent and reduction in excise duty on computers from 16 per cent to 8 per cent.

The lowering of Customs duties for specific select sectors is intended to provide a boost to these sectors. However, there is a flip side to the whose exercise in that instead of moving towards a uniform rate and simplifying the duty structure, now there are multiplicity of Customs rates — 5, 10, 15, 20 and 25 per cent. Earlier we were told that moving towards a uniform rate is a part of the tax reforms. Similarly, the abolition of air travel tax is a questionable move. Instead, it could have been used to improve airport infrastructure just as the cess on petrol and diesel is being used to finance the national highway development.

Hopefully, the reductions in Customs and excise duties will provide the much-needed impetus to the manufacturing resurgence being witnessed over the past two years by lowering investment and input costs. This should help Indian industry become globally competitive. The subsequent announcement of allowing India Inc to invest up to 100 per cent of its net worth abroad (the earlier ceiling was $100 million) and to allow external commercial borrowings (ECBs) up to $500 million through automatic route) will provide a further boost to Indian industry's globalisation process.

The other sops include allowing Indian citizens to remit $25,000 abroad every year, removal of restrictions on corporates from engaging in farm sector activities abroad, proposal to launch "Dada-Dadi' bonds to enable senior citizens above the age of 60 to earn a higher rate of interest from April1, 2004 and reduction of interest on educational loans to students to 200 basis points below the PLR. All these measures do not really amount to much except helping fuel the feel-good factor.

The second round of sops announced on January 9, the Finance Minister read like Part A of the usual Budget, the first instalment being Part B. In this part, he has tried to target agriculture and rural India, the small-scale industries and senior citizens. Here the amounts shown on paper are huge — Rs 50,000 crore over the next three years for what he calls "the Second Green Revolution", another Rs 50,000 crore for infrastructure development, and Rs 10,000 crore for the small-scale sector. These are just grand announcements that may take years to materialise, if at all.

For instance, it is stated that banks/FIs would be asked to catalyse investments of Rs 50,000 crore in core sector. A consortium of IDBI, IDFC, LIC, ICICI Bank and State Bank of India are to formulate policy and procedures for funding projects in power, ports, roads, tourism, and telecommunications. It is also stipulated that core sector would get soft loans at 200 basis points below the PLR. Unfortunately, public memory is short. It may be recalled that in his Budget for 2003-04 also Mr Jaswant Singh had laid a major thrust on infrastructure development involving an investment of Rs 60,000 crore. Most of the ambitious plans are still on paper.

As for the proposed Rs 50,000 crore funds flow to agriculture over a period of three years, the Finance Minister has indicated that the proposed Fund will service the needs of various sub sectors including wasteland development, minor irrigation, functioning of co-operatives, grading, certification, storage of agro products, process, cold storage, and so on. However, it is still not clear from where the money would come from.

What the agriculture sector really needs is more budgetary allocations from the Centre and States and adequate flow of commercial bank credit. Unfortunately, the flow of bank credit to agriculture and allied activities remains woefully inadequate despite repeated attempts by RBI to persuade banks to lend more to the sector. The percentage of total agricultural advances, as of March 31, 2003, was 15.3 per cent for public sector banks and 10.8 per cent for private sector banks against the minimum stipulated 18 per cent.

In addition, it is stipulated that the Small Industries Development Bank of India (SIDBI) would be asked to set up a Rs 10,000 crore fund to provide loans to small and medium enterprises at two per cent below its current PLR. SIDBI is to structure the Fund and finance the SSIs over the next two years. Are we not getting a sense of déjà vu in all this? A number of such proposals in the past, including the specialised SSI branches of commercial banks, have failed to increase the flow of funds to this vital sectors of the economy. As for the role of SIDBI in providing assistance to the SSI sector over the past decades, it has remained far from satisfactory.

This is not to suggest that all the proposals are false promises. Those in part I relating to changes in indirect taxes have already come into force and could have a salutary effect on the manufacturing sector. The problem is with the proposals in Part II of the package. These are mostly promises on paper and there was no tearing hurry to announce them before the presentation of regular Budget after the polls. Apparently, the ruling party has decided to use them to fuel the feel good factor to gain political mileage.

There is one more problem with the proposals which is much more formidable. They address mostly the supply side of the problem and neglect the demand side and, hence, may not be sufficient to sustain the growth momentum of the economy witnessed this fiscal. The domestic demand for goods and services cannot grow by any significant extent unless the country is able to address the problem of growing unemployment and continuing impoverishment of rural India. Since 70 per cent of the people live in rural areas, rural demand holds the key to the overall economic growth.

Unfortunately, the urban-rural consumption divide has widened even more in recent years. According to the 57th round of National Sample Survey (NSS), the monthly per capital consumption expenditure (MPCE) in urban areas was 87 per cent higher than in rural areas in 2001-02. This gap was 84.6 per cent in the previous year. While the average MEPC in towns was Rs 933, in rural areas, it was just Rs 498. Consumers in rural India spent on an average Rs 278.35 (55.46 per cent) on food and Rs.222 (44.54 per cent) on non-food items.

The reasons for the growing rural-urban consumption divide are not far to seek. Largely because of the big decline in public investment in agriculture sector, post reform, the share of agriculture and allied activities in the country's GDP has steadily declined from 32.2 per cent in 1991 to around 24 per cent in 2002-03. However, more than two-thirds of the country's population continues to depend on this sector even now and it provides employment to 60 per cent of the productive workforce in the country. Consequently, the overwhelming majority of population, which depends on agriculture for its livelihood, is getting increasingly impoverished.

There is hardly anything in the proposals to address this formidable problem. True, there is a new rural housing scheme called ``Atal Grameen Griha Yojana'' which will become operational from April and would include, among others, a mechanism to provide insurance cover against defaults arising from non-enforceability of security because of defects in the title or title disputes. This scheme also seems to be put together in a hurry and it may take months before the details are finalised.

Two things can provide a quicker relief to the rural poor and help in bridging the urban-rural divide:

increased flow of bank credit to agriculture sector; and

a more aggressive spread of micro finance.

The programme of micro finance has emerged as the most suitable and feasible alternative in accomplishing the goals of growth and poverty alleviation.

The spread and reach of micro finance can be increased significantly by involving more non-government organisations (NGOs) as also the business houses. NGO-business partnership can provide more gainful activities to the rural poor.