The Hindu Business Line : Great Budget expectations

SUBJECT to the considerations set out earlier, what are the options before the Finance Minister? It is a constant refrain of the financial commentariat (the latest coinage signifying the commentators as a class!) that in exercising whatever options they had, India's Finance Ministers have had their manoeuvrability cramped by the familiar Banquo's ghosts of fiscal deficit and subsidies. International financial institutions, and the IMF, in particular, have been hitting hard at India's incapacity to pare the fiscal deficit which is in excess of 10 per cent of the GDP (taking the Central and State deficits and losses of public sector undertakings) to what they call a "sustainable" figure.

In response to these pressures, the Government has enacted the Fiscal Responsibility and Budget Management Act, committing itself to wipe out the revenue deficit by 2008 (since extended to 2009) and the overall fiscal deficit by phases as per targets to be notified under the Rules. The current financial year's target is to reduce the revenue and fiscal deficits by at least 0.5 and 0.3 per cent respectively of the GDP.

Banquo's ghost at the table

While there can be no two opinions about the desirability of fiscal prudence, it should not be allowed to become a fetish, militating against the adoption of measures to bolster the economy by increased capital investment. A deficit is as a deficit does. It should certainly be regarded as taboo if it is a result of the Government indulging in profligacy and squandering money on current consumption, especially on salaries and wages for a bloated bureaucracy and pampered labour force. But a more pragmatic view is justified in the case of a deficit consequent on a higher magnitude of investment leading to creation of productive assets capable of fetching commensurate return.

In any case, there can be no magic figure below or above which a fiscal deficit becomes acceptable or condemnable, since everything is contingent on whether it engenders wealth or ends up as waste.

The Finance Minister would do well to face up to this bogeyman squarely and not allow himself to be inhibited in providing for the needed investment in critical employment-intensive sectors such as agriculture, food processing, infrastructure and rural development, by putting to use a part of the foreign exchange reserve, if necessary.

The working of India's system of subsidies, however, has several loopholes that constitute a drain on scarce resources, to the extent of 4.18 per cent of GDP in 2003-04. There is no question that plugging them will bring about a salutary improvement in the marshalling and management of finances.

By and large, the report tabled last month in Parliament by the Finance Minister on `Central Government Subsidies in India', prepared with the assistance of the National Institute of Public Finance and Policy, has come up with recommendations that are eminently sensible. Essentially, they have to do with doing away with what it categorises as non-merit subsidies, retaining subsidies for the poor and deserving sections of the population and ruling them out for the rest, recovering cost of facilities and services by levying user charges and getting rid of distortions caused by cross-subsidisation and hidden subsidies. It is not considered necessary to dilate on them any more here since they have been the subject of extensive coverage in the media. Suffice it to say that State governments, prone to pandering to vested interests, are worse sinners in this respect and it will be worthwhile to bring out a similar report on their practices so as to deal with the problem of subsidies in a holistic manner.

However rational the arguments in favour of pruning subsidies, it will be impolitic for any Government to do so with an abrupt and peremptory fiat. It will be wrong to assume that the objection to reduce subsidies always arises from any blind populism of bleeding hearts or cussedness on the part of political opponents. It may stem from a genuine conviction that they are a source of sustenance and protection for the poor, the vulnerable and the disadvantaged.

It is, therefore, imperative for both the Prime Minister and the Finance Minister to be alive to this feeling and prepare the ground by holding talks patiently and in a spirit of empathy for as long as it takes to persuade the doubters to their point of view. All previous attempts by Mr Chidambaram's predecessors, including Dr Manmohan Singh, to control the outgo on this account ended in a fiasco precisely for want of such a subtle and sensitive approach. Even now it is not too late for them to engage the coalition partners, leading lights across the political spectrum and the economic council members in a constructive exchange of ideas and enlist their support for making headway on this issue. Nothing less than a bold leadership of this kind will do to break the continuing impasse.

Achieving fine balance

It is evident from the pronouncements of the Finance Minister at various forums that the forthcoming Budget will balance the steps to carry forward the strategy to make Rural India shining with the need to comply with the WTO requirements for easier market access to goods, commodities and services by reduction of tariffs and duties. (It is estimated that, thanks to the removal of quotas under the multi-fibre agreement and other restrictions affecting trade in textiles and clothing, developing-country exports to the major OECD countries could increase by 82 per cent for textiles and 93 per cent for clothing, while the removal of both tariffs and quotas could increase developing-economy exports of clothing by 135 per cent and those of textiles by 78 per cent. There are other euphoric estimates of even higher potential effects.)

Here are certain other features of the Budget in the making gleaned from the recent statements of the Prime Minister and the Finance Minister:

The Budget will be growth-oriented and inclusive without leaving any section.

It will give a determined push to "massive tax reforms", make the structure simple and stable, and raise the tax-GDP ratio from nine to beyond 11 per cent.

It will usher in an investor-cum-industry friendly tax regime, especially for the sugar, textile, petroleum and telecom sectors.

It will be designed to attract huge investments in agriculture and infrastructure, quicken banking reforms and provide a roadmap for the Government's monitoring of inflation and management of money supply.

It will help convert savers within the country into investors for achieving growth rates of 10 per cent and above on a sustained basis. ("With appropriate commitment, it is both necessary and feasible....It can be done — because others have done it," says Ms Anne O. Krueger, IMF's First Deputy Managing Director.)

The process of lowering tariffs and Customs duties will be accelerated in order to facilitate a closer interaction between India's economy and the economies of the Asean region.

(It may be instructive here to give an inkling of what China as a member of the WTO has done: It has abolished all licences and quotas on January 1, 2005. All products are subject to zero per cent duty rate from this year. As for tariff reduction, it will cover the whole of agriculture by end-2004 and 98 per cent of industry by end-2005; the comprehensive average tariff rate for industry will be 9 per cent in 2005. Industry circles in India have urged the Finance Minister to reduce the peak rate of Customs duty from 15 per cent to 10 per cent in the coming Budget, excise duty from 16 per cent to 8 per cent, withdrawal of the eight per cent special excise duty, reduction of Cenvat from 16 per cent to 14 per cent, and generally simplify and streamline the duty and tax structures in line with the recommendation of the Task Forces on Fiscal Responsibility and Budget Management and Direct and Indirect Taxes.)

Acid test

Whatever the Finance Minister does, the acid test of the Budget will be whether it is going to strengthen the three most important cornerstones of India's development strategy: Rural prosperity, increased investment and equitable sharing of the fruits of economic progress through an extended social infrastructure and social security network and pulling the backward States to the level of the advanced ones. His calculations are all in danger of being mucked up if the plans and schemes, incentives and exemptions, are rendered meaningless by slippages in implementation, poor delivery of promised public services, rigidities in labour laws affecting productivity, systemic, procedural and bureaucratic bottlenecks, and heavy transaction and opportunity costs.

Why should it take 89 days to get a clearance to start a business in India as against two days in Australia, seven in the US, 10 in the UK, 24 in Pakistan, 35 in Bangladesh, and 50 in Sri Lanka? Why should losses in transmission and distribution of electricity in India range between 30 and 40 per cent, while it is only eight for a vastly more extended system in China? Over 40 per cent of Indian firms blame unreliable and low quality electricity supply as a crippling constraint compared to less than 10 per cent in Eastern Europe and less than 25 per cent in Latin America and East Asia. A study shows that if only labour here will put in an honest day's work, 80 per cent of the productivity gap could be closed and wages could rise by 38 per cent and that firms in States with poor investment climates have 40 per cent lower productivity that those in States known for high performance.

What it all amounts to is that it will not be enough for Mr Chidambaram to have just his vision, priorities and allocations right. The far more formidable challenge of translating them into tangible accomplishments will have to be met by setting up a Group of Cabinet Ministers under the chairmanship of the Prime Minister to speed up implementation along the lines envisaged in the Budget and help the economy take wings.

(Concluded)

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