Financial Daily from THE HINDU group of publications
Wednesday, Jul 28, 2004
Industry & Economy - Economy
Budget: Poor get a hearing
The Finance Minister, Mr P. Chidambaram, given the economic and political constraints of the day, has done a good job. The real test, as the Finance Minister, has himself conceded, lies in translating the Budget proposals into action. Will the new government be able to belie the Nehruvian lament that Indians are good at planning but bad in implementation, remains to be seen.
Benefits of economic growth
The important thing is that the poor have gained a hearing in the Budget. Their feeble voice had been drowned in the cries for reforms in the past decade or more. In an unequal society such as India, benefits of economic growth gets distributed unfairly.
Sharper the growth, sharper the maldistribution. This is what has been happening in recent years. This Budget has at least acknowledged the widening gap between the rich and poor, the urban and rural areas and agriculture, on the one hand, and industry and services, on the other.
The focus on subsidised food grains distribution, public distribution system, food for work programme, scheduled castes and tribes, minorities, self-help groups, rural credit, drinking water, education, health, irrigation and rural infrastructure, water harvesting and flood control, rural insurance schemes, rural housing, crop diversification, special schemes for backward states and so on is bound to bring some succour to the poor.
With some commitment from the implementing agencies and co-operation from the State governments, these schemes can generate viable sources of lasting income and employment. The State governments cannot hold any proprietary rights over poverty, eradication of which is a common responsibility. Introduction of the education cess to promote basic education may not be a novel idea, but it is certainly a bold one. Wonder why it took the country more than five decades to think it up.
Unlike in the past, the anti-poverty proposals in the Budget have been designed as continuous, self-sustaining measures rather than mere one time give-away. For instance, the banking system, comprising the commercial, banks, regional rural banks and the co-operative banks has been assigned a mammoth task of doubling farm credit in the next three years.
But this time there is no harking back to the days of loan melas and subsidies. On the contrary, a number of steps have been announced to make rural lending creditworthy. Lack of farm insurance has been a major lacuna in rural credit.
The Budget has made a serious attempt to take insurance into the rural sector in a big way, which alone can ensure the flow of adequate and regular bank credit to the agricultural and other rural sectors.
The Budget has rightly stressed the role of self-help groups, which have emerged as a powerful agent of change in the rural areas. Nearly 11 lakh SHGs have been set up since the scheme was launched 12 years ago. Another six lakhs are to be added by 2007. This is a vast reservoir of committed (wo)manpower, which entrepreneurs in the country and abroad can gainfully tap. Banks would be only too willing to finance such enterprises.
A remarkable feature of the Budget is that it has not robbed the rich Pauls to pay the poor Peters. It has a host of incentives to revive industrial growth and accelerate growth in the services sector, particularly in the software industry. Tax reliefs and exemptions that have been announced can rev up these sectors at once.
The proposals to set up an Investment Commission, a National Manufacturing Competitiveness Council and a Board for Reconstruction of Public Sector Enterprises are aimed at strengthening the industrial sector in the medium term.
The Budget does not seek to make any changes in the industrial policies being followed, post-reforms. Also, contrary to expectations, it does not enter into any needless debate over the supremacy of the private and public sectors. Instead, it seeks to tap the respective merits of both the sectors. As the the architect of modern China Deng Xiopeng put it, what does it matter whether the cat is black or white as long as it catches mice.
The Budget makes clear that reforms are on course but with due caution. It is a measure of its independence, despite the commitment to CMP, that the Budget made bold to substantially relax the foreign direct investment limit for telecommunication, civil aviation and insurance. A higher dose of FDI in such basic services is a sure way to make them efficient and bring down cost. Insurance, in particular, holds great hopes for the hitherto neglected spheres of health and rural sector.
The capital market, which has been playing truant since the new Government assumed office, appears to have given the thumbs down to the Budget proposals. It is angry at the move to impose a turnover tax on share purchase. The Budget contains a number of progressive measures for the orderly growth of the capital market. The foreign institutional investors (FIIs), who have been adding fizz to the stock market in recent years, have been given a wider berth. Yet, it is strange that the market should take umbrage at the new levy which is aimed mainly at the speculators.
There was much speculation over what the Budget's thinking would be on the interest rates, especially on small and compulsory savings. In the event, it has rightly chosen to leave the rates untouched except announcing a 8 per cent savings bond for long-term savers and another scheme with 1 per cent additional interest for senior citizens.
Softer interest rates have been working well in the country. They have lowered the burden of national debt, helped revive a sick banking system, raised critical consumption demand in the economy and generally turned risk averse savers into investors. Tinkering with the rates now will only send confusing signals.
Bank credit offtake
Lower interest rates, combined with the growth impulses contained in the Budget, should lead to a pick up in the offtake of bank credit. At the same time, the Budget has not sought to dilute the norms of credit assessment or recovery in any way. While enhancing the limits, quite substantially, for education loans without collateral, banks have been asked to get satisfactory guarantees for the same.
Similarly, the Budget has promised to make suitable amendments (in the wake of the confusion arising out of the recent Supreme court judgment on the Act) to the Sarfaesi Act, which has come as a boon to the banks in the recovery of dues. In our enthusiasm for liberalisation, a vital institution such as the Planning Commission has been relegated to the position of, as some critics say, an unwanted fifth wheel. However, the NCMP envisages a much more enlarged and active role for the commission. Befitting its new avatar, the new Government has entrusted the commission in the hands of the most respected and experienced economist-planner-administrator, Dr Montek Singh Ahluwalia. The Budget has advised the commission to redefine its priorities and redraw its programmes in accordance with the NCMP.
(The author is an economist with Indian Overseas Bank and can be contacted at firstname.lastname@example.org)
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