The Hindu Business Line : Budget: The playmaker's play

The Finance Minister, Mr P. Chidambaram, has become the playmaker that he had in mind. He has delivered an acceptable Budget, which has adopted a holistic approach to growth. It has hit the bull's eye by addressing the scope and means of farm livelihoods. It plans to chart a roadmap for farm output diversification. There cannot be a better proof that the government is earnest about leveraging the shift in e-power towards the private sector, says G. Ramachandran.

WHILE out of the Finance Minister's office in North Block, Mr P. Chidambaram often wore the cap of a very readable columnist. He argued forcefully — he is a very winning lawyer too — in December 2002 that India needs a playmaker to score reform goals. Two years hence, Mr Chidambaram has become the playmaker that he had in mind. He has delivered an acceptable Budget.

The Budget distinguishes itself from previous budgets. It has adopted a holistic approach to growth. In one comprehensive sweep, it addresses the needs of the rural outback, a small but highly competent manufacturing sector and a highly entrepreneurial but fragmented services sector. It acknowledges the shift of economic power (e-power) towards citizens, farmers and firms. A raft of cuts in taxes, duties and tariffs is the right response to the shifting away of e-power from government.

The Finance Minister has boldly and sanely co-opted households, farms, produce markets, manufacturers, service providers, and banks and financial markets into a winning team. If every constituent of this winning team can play to its full potential, India too can. The playmaker's programme for action is inclusive, but India Inc. has been disabled by two tax proposals.

The economic programme conforms to the empirically proven model of development aimed at balanced and sustainable economic growth. Balance and sustainability are together non-negotiable, and one leads to the other. The stock market has risen by over 2 per cent. The two major stock indexes — Nifty and Sensex — have remained steady thereafter. This is some proof that the Budget has been holistic.

Serving the bottom

India is among the world's largest and highly diversified economies. However, the size and diversity have not yielded the desired results. Growth in the other large, diversified economies has been achieved by consciously following a policy aimed at creating high-wage, high employment opportunities so that the workforce could willingly migrate away from agriculture into industry and services.

India needs massive high-wage, high employment opportunities, but they have been elusive. Per capita income from agriculture grew merely by 2.10 per cent over the last six years. With over 50 per cent of the households rooted in agriculture, the meagre growth in per capita income from agriculture has acted as a concrete ceiling for growth in manufacturing and services. Per capita income from industry grew by 2.51 per cent. Per capita income from services grew by 2.88 per cent.

The Budget has hit the bull's eye by addressing the scope and means of farm livelihoods. It plans to chart a roadmap for farm output diversification. It hopes to draw in the private sector for setting up agricultural markets, marketing infrastructure and support services. Clearly, there cannot be a better proof that the government is earnest about leveraging the shift in e-power towards the private sector.

Moreover, the goals of `Bharat Nirman' are worthy of international attention. India may well exceed many of the targets included in the Millennium Development Goals. By stirring up genuine and sustainable reform action in the farm sector, the playmaker's programme will most likely lead to a spurt in demand for manufactured goods. An expanding manufacturing sector will expand the scope and the depth of the services sector. It is apt that service providers with business up to Rs 4,00,000 have been exempted from the service tax.

Fresh talent will be needed to support the expansion in manufacturing and services. Workforce from the low-paying farm sector will migrate to high-paying jobs. That is the benefit of serving the bottom. The benefits may be of a very large magnitude and future revenue deficits may shrink.

Loading the leading edge

The Budget has stressed the importance of outcomes over outlays. Towards making the desirable outcomes possible in the leading edge sectors, the manufacturing competitiveness programme aimed at the small and medium enterprises (SMEs) has been proposed. There is more. Textiles, sugar, pharmaceuticals and biotechnology have been targeted for development. The SME Growth Fund and the dedicated funds may bring the necessary discipline of the market where outlays often fail.

Leading edges have to be necessarily thin and sharp. That is when they cut. But they derive their sharpness and endurance from the breadth and robustness of infrastructure.

Expansion of telecommunications, the third phase of the national highways project, and the special purpose vehicle (SPV) for funding infrastructure projects that are financially viable are aimed at such breadth and robustness.

It would be of academic and practical interest to analyse how India's foreign exchange reserves would be tapped, if at all, towards funding the SPV.

Cash and chips

India can take pride in having worked assiduously on strengthening its banking and financial sectors over the last decade. The tasks have been complex, and the process is far from complete. But the results over the last decade have been truly breathtaking as well as rewarding. The ``reform and strengthen'' process has received a further shot in the arm. The Banking Regulation Act, 1949, may soon be amended to provide greater flexibility to banks and access to preference capital. This would enable banks to better comply with the Basel 2 norms.

Compliance with Basel 2 norms would be made possible further through the initiatives pertinent to the securitisation of debt. Securitisation would enable trading and the appropriate measurement of risk. Moreover, India's unfulfilled demand for housing is so large that over-the-counter (OTC) bank loans have struggled to find the right sources of funding while containing the riskiness of lending. Mortgage-backed-securities in the home loans segment will play a significant role in serving the demand for home loans while keeping the lending-cum-funding risks in check.

India has been a late starter in financial derivatives. Also, the resumption in commodity derivatives was made possible after four decades. The good news for these sectors comes in three parts. First, foreign investors may soon be permitted to meet collateral requirements through a more vigorous use of cash equivalents. Second, gold exchange traded funds (GETFs), a derivative with gold as the underlying asset, may soon be listed by mutual funds for investment and trading. Household may be able to buy and sell GETF units for as little as Rs 100.

Third, the purpose and power of OTC derivatives would soon be put to use. India chose to be a late starter in derivatives because it regarded derivatives as purely speculative instruments. Hence, regulatory approval was given to exchange-traded derivatives. OTC derivatives with the exception of foreign exchange forward contracts and some swaps are prohibited. The Budget sets the stage for the inclusion of OTC derivatives. Hedging will no longer be a cosmetic exercise.

Smart Johnny's play

The Budget has had no choice but to pursue the policy of cutting Customs duties so as to go closer to those of India's trading rivals in Asia. Customs duties on selected capital goods and parts have been reduced. Significantly, duties on textile and leather and footwear machinery have been cut to 10 per cent. It is more than likely that India's price competitiveness in textiles and leather would rise.

The numerous cuts in indirect taxes may not be as interesting to households and income earners as the cute, Smart Johnny cuts in direct taxes are. The Budget formalises the no-tax bracket at Rs 1,00,000. The threshold limit is higher for women (Rs 125,000) and senior citizens (Rs 1,50,000). Smart Johnny's teammates also have earned a consolidated no-tax savings limit of Rs.100,000. They can apply this towards savings of their choice. As a result, ceilings for each mode of saving become irrelevant.

A cut in the corporate income tax rate was argued to be wholly justifiable (Business Line, February 28). Empirical evidence shows that corporate tax rate cuts since 1990 have turned out to be enormously beneficial to the government. India Inc., government's faithful partner in tax reforms, does not let down government. The Finance Minister has rewarded domestic companies by bringing down the income tax rate to 30 per cent. He has also taken care to retain Minimum Alternate Tax (MAT). MAT is the best defence shareholders have against the overstatement of earnings by India Inc.

Two venomous stings

The proposal to tax cash withdrawals of over Rs 10,000 a day will hurt India Inc. and its shareholders. Companies, like government, need to make numerous legitimate cash payouts of small magnitudes that add up to a big daily total. The proposal to tax employers on fringe benefits to employees by itself is not disturbing. The fringe benefit tax is not unusual. But what is venomous is that it includes a list of legitimate expenses that India Inc. incurs to grow its domestic and global sales. India Inc. may not be able to perform to its full potential.

(The author is a financial analyst. Feedback may be sent to indiagrow@yahoo.com)

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