The Hindu Business Line : Further reflections on the Budget

The Budget's cost estimates for full employment guarantee far exceed the present provisions. And the administrative mechanism is lacking. Mr Chidambaram needs to address these concerns right away once he solves the problems arising from amendments on FDI ceilings, transaction tax on stock sales and farm credit.

THE Finance Minister, Mr P. Chidambaram's Budget 2004-05 has been the subject of many discussions, compliments and complaints. It has not been a Dream Budget, as his last effort was. But it is not the nightmare his critics have sought to make it. Mr Chidambaram has shown willingness to listen to critics and promised redress where complaints are justified.

Although much of the furore is over trivia, some of it is in areas of strategic importance from the policy point of view. But, one can be sure that the UPA's mechanisms of advice and consent will help the Finance Minister resolve the problems without affecting the broad thrust of policy disclosed by the Budget.

Since reviewing the Budget immediately on presentation on July 8, I have had the opportunity to explore its many details a bit further with reference to the detailed documents that form its basis. I present herewith a few comments, which have been made not in the spirit of nitpicking, but as well-intentioned suggestions that may merit further clarification and consideration by North Block.

First, let me make a comment on a slight discrepancy in the numbers presented in the speech and mentioned in the detailed supporting documents. Mr Chidambaram makes a claim in his speech as follows: "In addition to the gross Budgetary support of Rs 1,35,071 crore provided in the interim Budget, I propose to provide a sum of Rs 1,000 crore.

This and some other additional allocations will raise the total Plan expenditure to Rs 145,590 crore in the Budget estimates for 2004-05." I checked these figures with the figures provided in the interim Budget speech of Mr Jaswant Singh given in February 2004 as well as with those given in the detailed Budget estimates of expenditure as also the Budget at a glance.

First and foremost, Mr Chidambaram sold himself short, so to say, when he says the total Plan expenditure is Rs 145,590 crore in BE 2004-05. The Budget at a glance for 2004-05 as well as the detailed expenditure Budget provides a figure of Rs 163,720 crore for BE 2004-05 for the Central Plan. The gross Budgetary support given in interim Budget 2004-05 was Rs 81,367 crore and not Rs 135,071 crore indicated by the speech of Mr Chidambaram. The discrepancy deserves to be sorted out.

It is also instructive to compare the Plan provisions for individual sectors in the interim and final Budgets. There are no significant additions in the final Budget, although Mr Chidambaram's speech gives a promise of more to come. As Mr Chidambaram has himself indicated in his speech, he has asked the Departments to continue with the ongoing programmes until the Planning Commission completes an exhaustive review and reorients the expenditure to the NCMP objectives.

Suffice it to say that the Budget appears to have been put together in a short time to meet the objectives of the formal process of procedural completeness. As Mr Chidambaram himself says, we have to await further deliberations of the governing coalition as well as the Planning Commission.

Comments have been made that the large allocations made for States, like Bihar, should have been channelled through the Finance/Planning Commission. It is fair to point out that the additional provisions made for backward States are on top of existing provisions for the Rashtriya Sam Vikas Yojana for which a sum of Rs 1,000 crore was provided in 2003-04.

This is proposed to be enhanced to Rs 3,225 crore.

The device of the Backward States Commission may come in conflict with the established channels of devolution under the aegis of the Finance Commission and the Planning Commission. The sooner these real difficulties are sorted out, the better it would be for State-Central relations.

The Budget documents, as usual, contain a wealth of information on the details of estimates of revenue and expenditure. Much attention has been devoted by critics to whether Mr Chidambaram will be able to attain the estimates he has laid out for revenue collections. It is fair to point out that the Finance Minister had access to only three months' actuals to determine afresh his estimates for 2004-05.

His estimates for corporation tax, income-tax, excise and Customs broadly follow the interim Budget estimates and since the preliminary actuals showed the latter to be realistic, we can give the same credibility to the new estimates.

I feel the critics of over-optimistic budgeting may come a cropper if Mr Chidambaram holds to his policy of enforcing compliance through all the methods he is known for.

The Budget has not struck the right chord in the markets because of the transactions tax and the lack of any clear incentive for industry. I feel that this approach shows the greed for more and more concessions on the part of the corporate sector. The very decision to enforce fiscal austerity shows that Mr Chidambaram is going to restore private savings to their legitimate task — that of financing private enterprise. This point cannot be over-emphasised.

The new Deputy Chairman, Planning Commission, Mr Montek Singh Ahluwalia, has rightly stressed that the gargantuan appetite of Government for financial savings threatens to starve corporate sector as well as agriculture of access to credit. This is what is happening, partly due to the perverse operation of capital adequacy risk weights, which confer zero risk weight to gilts and higher weights to corporate and agricultural lending.

Whether a suitable modification in these weights can be thought of to incentivise bankers' appetite for lending for enterprise — small, medium or big, both in agriculture and industry — has to be carefully considered.

The documents attached to the Budget give a telling statement of the liabilities of Government as compared to its assets. The liabilities of Government of India stood at Rs 17,02,128 crore as against assets of Rs 8,92,123 crore. The assets are obviously lower than the liabilities, due to the large outlays of Government on revenue deficits, which do not create assets.

The scope for reduction in public expenditure on non-Plan items has been examined by various Commissions and Task Forces. I hope that the task of expenditure control does not get obfuscated by new Committees and bodies set up to restructure enterprise and by the NCMP proposal for a new Administrative Reforms Commission.

The secret of success in reducing government expenditure is obviously to attack the biggies, such as subsidies and Defence outlays. The answer lies in change of policies on a holistic basis, such as introducing new foreign policy initiatives to cut Defence outlays and to adopt new policies in respect of governance.

Particular importance attaches to changes needed in grain procurement and food distribution, besides encouraging FCI to approach the market for lower-cost funds. There is need to avoid a heavy-handed approach in expenditure compression because very often the existing schemes serve different but meaningful social goals.

The Government machinery related to food procurement and distribution needs to be restructured with great care, lest we destroy the basic sustenance of our rural economy, which depends very considerably on the efficient working of the MSP system and the government procurement, given the absence of private procurement and storage agencies. We have to ensure that before we pull down the current edifice, we enable the working of a substitute hierarchy of agencies in the private or cooperative sector.

There are a number of loose ends in the Budget. Most important is the question of the full employment guarantee.

The estimates of costs of full employment guarantee far exceed the provisions that are now in view. Above all, the administrative mechanism is sorely lacking. Mr Chidambaram needs to address these concerns right away once he solves the problems that have arisen from his amendments on FDI ceilings and transactions tax on stock sales.

The Budget is just a beginning. It is a policy statement that has to be interpreted interactively by all stakeholders. It cannot be treated as cast in stone.

The Finance Minister should be willing and able to make the necessary changes as he goes along and as problems are brought to surface. The good news is that he has made a good beginning in this respect. The secret of success is to be flexible and make adjustments as are necessary and feasible, without compromising the big picture.

There is sufficient goodwill for Mr Chidambaram and his team, especially given the fact that he is operating under the wise leadership of Dr Manmohan Singh. It is up to Mr Chidambaram to walk the extra mile to encash the goodwill and make the Budget a handbook for reforms and growth with equity. The nation looks up to him with a prayer and a hope.