The Hindu Business Line : Mid-Year Review: Not a sanguine picture

One finds little cheer in the mid-year review of the economy so far as the fiscal performance thus far is concerned, even if the overall economic outlook is bright. With fiscal measures unlikely to be able to support sustainable 7-8 per cent growth, the Government will have to involve the private sector in a big way and attract larger foreign direct investment to meet growth and development objectives.

IT IS Budget season in North Block, and the negative trends emerging from the Mid-Year Review presented by the Finance Minister, Mr P. Chidambaram, to Parliament on December 13 underline the challenges before him in addressing the "insufficient investment and inadequate infrastructure" that constrain higher economic growth.

The Prime Minister, Dr Manmohan Singh's policy utterances and the Finance Minister's own statements during 2004 have built up expectations of a path-breaking Budget from the UPA Government for 2005-06, which would not only embody major tax reforms but also provide for effective implementation of some of the principal commitments in the National Common Minimum Programme (NCMP), the socio-economic charter that the Congress-led coalition has given itself.

If Dr Manmohan Singh's 1991-92 Budget brought about the paradigm shift for the Indian economy, from controls to market-orientation, the 2004-05 Budget under his Government was expected to become the harbinger of social change with a new deal for rural India and an development agenda that is "inclusive and caring" .

The Prime Minister has also committed his Government to vigorous pursuit of essential reforms to achieve the 7-8 per cent growth target that the NCMP set and to raising levels of investment for infrastructure and social spending without deviating from fiscal prudence.

It is against this background that the Mid-Year Review of economic and fiscal performance needs to be analysed, though it must be conceded that the Government had hastily to present a Budget for the current year with only ad hoc provisions for making a beginning with some of the promises like food-for-work but geared essentially to adhering to targets of the Fiscal Restructuring and Budget Management Act.

The Tenth Plan (2002-07) was being appraised, in the light of the first three years' progress, and reoriented to conform to the key priorities in the NCMP. The reconstituted Planning Commission had expressed some reservations, not only about the original Plan growth target of 8 per cent but also on financing of massive programmes under the proposed National Employment Guarantee Act.

Economic management in 2004 ran into the unexpected zoom in international oil prices, which triggered a sharp rise in domestic inflation, apart from the impact of a deficient monsoon and excessive liquidity in the banking system. Control of inflation without passing the burdens of the rising fuel costs to the people became the major preoccupation of the Government with the pro-poor image it had created for itself.

As the year closes, there has been little moderation in inflationary pressures, though the hopes were that oil prices, which had begun to decline from a peak $56 a barrel in October to $41 by mid-December, would stabilise in the coming weeks.

Price stability would thus remain a major concern in formulating the forthcoming Budget, whatever other ambitious objectives it would set itself.

The UPA Government suffers from two formidable constraints: First, it has to operate within the framework of fiscal discipline under FRBM rules, which stipulate the limits of revenue and overall Budget deficits. The Finance Minister has admitted that the Government's budgetary record in the first half of the year, with slippages, did not meet the benchmarks of FRBM.

Second, the ruling coalition is under continuous pressure from the Left, which, though extending its critical support from outside, has been resisting many of the Government's policies and moves, creating uncertainties for growth-oriented reforms and structural changes.

Mr Chidambaram will have to take into account these realities in undertaking tax and subsidy reforms, for raising revenue and investment ratios to GDP, and in setting the directions of economic policy for 2004-05.

In this background, one would find little cheer in the Mid-Year Review so far as the fiscal performance thus far is concerned, even if the overall economic outlook is bright with new strengths from industrial revival and an export upswing, business confidence and capital expenditure, and the market mood upbeat with heightened foreign investor interest.

A 6-6.5 per cent growth this year and in the coming year seems quite achievable, and perhaps a higher rate of 7-8 per cent in the final year of the Tenth Plan (2006-07), as the Planning Commission believes.

It was apparent at the time the 2004-05 Budget was presented on July 8 that revenue assumptions were far too high, in relation to trends, though the Finance Minister said these also reflected the likely outcome of special drives to collect tax arrears.

On the basis of what has been accomplished so far, while there is certain buoyancy in tax collections, in the current year, the Mid-Year Review does not provide encouragement that the budgeted revenue mobilisation and deceleration in expenditure are within reach in terms of the revenue and fiscal deficit targets for 2004-05.

While on the receipts side the Finance Minister had to forego some revenue under indirect taxes as part of containing inflation, the Budget is under stress on the expenditure side, with additional requirements for the food-for-work programme and fertiliser subsidy.

Mr Chidambaram hopes that "corrective measures" to tone up tax collection and check low-priority spending in the second half of the year would help ensure that deficit targets are "substantially" met.

There will be reservations regarding the extent to which Government succeeds in narrowing the gaps.

Interest will, however, shift to the more comprehensive budgetary exercises for next year. These have to incorporate the recommendations of the Twelfth Finance Commission headed by Dr C. Rangarajan, on the devolution of resources to the States (2006-10) and possible debt relief. The TFC's wide-ranging recommendations would certainly have significant implications on the overall fiscal position of both the Centre and the States. The expenditure pattern, on the Plan side, would be broadly in conformity with the mid-term appraisal.

While the States have agreed to implement VAT from April 1, 2005, the Centre is to provide for compensation for revenue losses that may be incurred by the States.

The Mid-Year Review talks of targeting and rationalising subsidies on the basis of the study by the National Institute of Public Finance and Policy as also of restraining increases in minimum support prices for crops. These may not be politically welcome, whatever the economic rationale.

While the Government will embark on a new wave of tax reforms, in the light of the reports of expert committees (especially the Kelkar Task Force), the Review does not hold out hope for any substantial thrusts in public investment.

This is a matter of concern considering the massive outlays required for employment and human resource development programmes for which little private funding will be available. More so, as the Government is itself bound by the FRBM rules.

Even after fiscal consolidation and elimination of revenue deficits (four years hence, if all goes well), the Government alone, the Review says, cannot generate the resources needed for adequate investment to support sustainable 7-8 per cent growth.

The case is thus made for involving the private sector in a big way and attracting larger foreign direct investment to meet development objectives.

Public-private partnerships are seen as an alternative to traditional public investment in infrastructure.

Besides user charges, the Finance Minister has hinted at a funding mechanism to make projects with sizeable private participation in infrastructure viable.

The issues raised in the Finance Minister's Review in the areas of agriculture, investment, taxation, subsidies, infrastructure and structural reforms call for bold decisions, and the Government would need to build the maximum possible consensus within the UPA and the Left on the economic policy thrusts in the coming year.

(The author, a former Chief Editor of PTI, is a New Delhi-based freelance writer.)

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