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Friday, Jul 09, 2004

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Budget 2004-05 — Strong step towards growth, stability and equity

S. Venkitaramanan

Building on the Budgets of his predecessors and at the same time taking care to meet the objectives of the NCMP, the Finance Minister, Mr P. Chidambaram, has succeeded in the task of constrained optimisation. The Budget is impressive for the number of initiatives it has taken in respect of disadvantaged areas of the country. Ultimately, however, its test lies in its implementation, says S. Venkitaramanan.

AS expected, the Finance Minister, Mr P. Chidambaram, has presented a Budget that will be music to the ears of many, in particular the members of the UPA coalition. It should be conceded that he has performed an almost impossible task in presenting a Budget that is innovative, fiscally sensible, growth-oriented and caring in every sense of the term.

He has, indeed, succeeded in the task of constrained optimisation, operating as he did under the constraints and the mandate of the National Common Minimum Programme (NCMP).

The first feature of the Budget to note is that he has not resorted to the easy option of discarding the initiatives of the previous governments or renaming the programmes started by them. He has built on the Budgets of his predecessors while at the same time taken care to meet the objectives of the NCMP.

The revenue deficit in terms of GDP is estimated to be one percentage below the corresponding estimate of 3.5 per cent of GDP for 2003-04. The fiscal deficit estimated at 4.4 per cent of GDP compares with 4.8 per cent estimated for 2003-04. The reduction in deficit numbers has been enabled by the impressive growth in revenues, especially corporate tax, service tax and income-tax, reflecting the rate of growth of the economy.

On privatisation, Mr Chidambaram has estimated a reduced inflow of Rs 4,000 crore in keeping with the mandate of the NCMP. The Budget reflects an increase in capital expenditure, especially with regard to infrastructure and defence. The Finance Minister has substantially enhanced the allocation for defence keeping in view the needs of the capital requirements. He has to ensure that these expenditures are incurred in the right manner. As the Finance Minister has stated, the Budget also provides support to public sector enterprises in need of relief and rehabilitation. The Finance Minister has proposed an institution for reorganising the weak enterprises.

Public sector managers, who perform better in the liberated circumstances of private sector enterprises have been known to complain that they are crippled by various regulations in a public sector entity.

Unless a radical transformation is made to liberate the public sector manager from multiple scrutiny by organs of investigation and vigilance, a level playing field cannot be established between the public sector and the private sector. The bodies proposed by the Finance Minister for ensuring competitiveness and rehabilitation of public sector enterprises should also look into these hurdles.

The Finance Minister has laid emphasis on agriculture and rural sector in keeping the NCMP. The various initiatives announced by the Finance Minister in his Budget are well-worth taking. They represent the result of review of various programmes under implementation. The proposal to increase the flow of credit to agriculture has been duly supported by corresponding measures to increase the availability of rural infrastructure and marketing institutions. The attention paid in the speech to improving the state of water bodies in rural areas is particularly impressive. Mr Chidambaram has shown his awareness of the critical nature of the water question — both for drinking and for irrigation in rural areas.

Among the various steps in the rural sector, emphasis has to be laid on the announcement of re-establishment of a Rural Infrastructure Development Fund (RIDF). It is to be hoped that fullest co-operation will be extended by the various State Governments in implementing these programmes.

An important initiative of the Finance Minister is in regard to the setting up of an Investment Commission. He had put forward this idea even before the Budget. Whether another institutional entity is needed to communicate to investors the Government's policies is a matter of opinion.

Ultimately, it is the various Ministries and the State Governments who are responsible for bottlenecks that deter investors. It would have perhaps served the purpose better if he had strengthened the FIPB and decentralised powers from the Government to the State Governments. Instead, he has set up yet another body.

While in difficulty, Governments can set up new Committees and new institutions. I hope the Investment Commission does not suffer the fate. The Finance Minister's proposal, however, is a well intentioned move and deserves to be supported with adequate personnel and given good leadership, preferably by someone of the calibre of the status of the Finance Minister himself.

The Budget is impressive for the number of initiatives it has taken in respect of disadvantaged areas of the country. It has allotted large funds for backward states and hopes that these funds can help to reduce the balance between those states and the rest of India. Much depends, however, on the style of governance in the states concerned. A magic wand for improving governance of the states has not yet been discovered. It ultimately depends on the political will of the various members of the coalition that govern the country. Perhaps the most interesting reform the Finance Minister has introduced is in respect of taxation. His suggestion of raising the exemption limit for IT to Rs 1,00,000 in a novel way is not quite clear from the speech. One awaits further clarification.

As far as capital markets are concerned, Mr Chidambaram's proposal to substitute long-term capital gains tax by a turnover tax on transactions may receive only two cheers. There are fears that this proposal will create more complications for participants in the markets. But, I believe that it is a fairer way of dealing with capital markets on the lines of the Tobin Tax recommended by the Nobel Prize winner, Professor Tobin, in respect of share transactions globally.

The capital market should give a fair trial to the innovative reform proposed by the Finance Minister. The measure is surely intended to cut volatility while favouring long-term holding of equities. It should be considered a positive signal by the markets.

The Finance Minister's proposal in regard to taxation on textiles is bold and will help the elimination of a number of restrictions and disadvantages faced by the power looms and handlooms operators. This proposal involves an option to composite manufacturers, who choose between Cenvat or exemptions.

The Finance Minister has indicated that the Textile Minister has supported this proposal. I hope the textile industry does the same.

All in all, the Budget proposals represent a significant forward step in the journey of India towards attaining its goals of growth, stability and equity.

While it does not please all, it surely should satisfy most of the stakeholders in the economy, especially the poor and the neglected elements of the society.

Ultimately, however, the test of the Budget lies in its implementation and the secret of success of implementation lies with the State Governments and the organs of democratic decentralisation. The Finance Minister's challenge is to communicate the spirit of the Budget in its entirety to these organs of government, including those at the grassroots.

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