The Hindu Business Line : Union Budget 2005-06: Positive approach to fiscal consolidation

The Finance Minister has delivered a Budget that favours investment, job creation, minority welfare as well as rural and urban development. It is one of the best Budgets of recent times with the right emphasis on infrastructure and employment, provision of health and education, while stressing fiscal consolidation. But the pressure on State Governments to implement the various schemes has to continue unabated if the vision of the Budget is to be implemented, says S. Venkitaramanan.

THERE has been a lot of excitement in the country and in the market in anticipation of the Budget. But it is appropriate to say that the Finance Minister, Mr P. Chidambaram, has disappointed those who were expecting shocks and surprises. He has delivered a Budget that is positive in approach and has no glitches that may hamper implementation.

He has pressed all the right buttons in favour of investment, job creation, minority welfare as well as rural and urban development.

It is one of the best Budgets of recent times with the right balance of emphasis on infrastructure and employment, provision of health and education, and on urban improvement programmes while stressing fiscal consolidation.

The Finance Minister concedes that given the burden of the 12th Finance Commission's recommendations, he has found it difficult to frame the Budget in keeping with the FRBM requirement. However, he has been able to bring down the revenue deficit as promised earlier. The fiscal deficit is also within reasonable limits.

In regard to infrastructure, he seems to have found a way around the problem of resources. He has decided to establish a Special Purpose Vehicle (SPV) and provide it with needed government funds. The SPV will lend to infrastructure investment.

Whether this is a variation on the Deputy Chairman, Planning Commission, Dr Montek Singh Ahluwalia's idea of using the RBI's foreign exchange reserves remains to be seen from the fine-print. As it stands, it is a positive step forward to encouraging investment in infrastructure.

Resources from the private and public sectors will flow towards infrastructure projects only if the right tariff policies are in force. This is a problem that an SPV per se cannot tackle. I hope the Finance Minister will ensure that the group that will evaluate proposals for projects will insist on the right pricing for infrastructure services and for the appropriate bidding practices.

The Finance Minister has been able to win plaudits by his announcement in regard to both direct and indirect taxes. In respect of direct taxes, he has been populist in one sense but conservative in another. He has promised a further reform of the various concessions in regard to savings after study by experts.

So far as Customs duty is concerned, the Finance Minister has lived up to the expectations of analysts that he will reduce them. The modifications he has made in regard to Customs and excise duties are all in the right direction. Hopefully, they will encourage the development of the textile industry and knowledge-based industries for which capital equipment is necessary.

The Finance Minister has responded to the concerns about savings incentives by encapsulating different exemptions under one head. How it will work out in practice remains to be seen.

The Budget at a glance shows that the Finance Minister is still confronted by a large revenue deficit which, while it is only 2.7 per cent of the GDP, is still large in absolute terms — Rs 95,312 crore. He has to take further steps to reduce subsidies and non-Plan expenditure of the inessential kind. Given the fact he has had to meet the impact of the 12th Finance Commission's recommendations, this is the best outcome the country could have expected.

There is a vision statement included in the Budget about making Mumbai one of the financial centres of the world. That vision goes hand-in-hand with the various reforms which the Finance Minister has announced in regard to banking and as a tax treatment of derivative transactions.

But whether Mumbai can become an international financial centre without capital account convertibility is debatable. It behoves the Finance Minister to proceed carefully on this idea and to coincide it with a greater move on capital account convertibility and exchange rate flexibility.

A reading of the Budget at a glance shows that the Budget estimates for 2005-06 do not include any provision for receipts from divestment of public enterprises. Does it mean that the Government is going slow on the idea of privatisation? This must be to please the pundits of the Left.

There is, however, a significant mention in the Budget speech of the necessity to welcome foreign direct investment.

The Finance Minister has cited a telling anecdote of the statement by the Chinese counterpart at the recent G(7) meeting in London showing how China has received hundreds of billions of dollars of FDI.

It is perhaps a call to the Left to look East before it objects to the well-intentioned proposals of Mr Chidambaram for increasing FDI limits on critical sectors. What China has done in the last decade should be welcome to India also because both countries suffer from a scarcity of resources and technology.

To Mr Chidambaram goes the credit of meeting successfully the impossible trinity of the Fiscal Responsibility and Budgetary Management Act, the demands of the coalition partners and the expectations of the markets, both domestic and foreign.

The Budget includes a scheme for gold units, which will be traded in the market, like mutual funds. This idea has been around a long time. Mr Chidambaram has given it a positive and workmanlike shape. If successful, it will help reduce the Indian fascination for the yellow metal, which involves large expenditure on forex.

Ultimately, even with as good a Budget statement as Mr Chidambaram's latest, one has to concede that a Budget is only as good as its implementation.

The report card of the Government on July 2004 Budget is a promising indication of better performance in the years to come. But the pressure on compliance on the State Governments to implement the various schemes has to continue unabated if the Budget is to implement the vision of Dr Manmohan Singh and Mr Chidambaram.

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