The Hindu Business Line : Budget: No change in gear or direction

The Finance Minister, Mr P. Chidambaram's Budget was clear-cut, given the current state of the economy. It has used fiscal incentives to sustain growth in production and consumption and Plan allocation to ensure equity and fair distribution to ``bring the greatest good to the greatest number''.

THE Finance Minister, Mr P. Chidambaram, in presenting the Budget for 2005-06, has not let good come in the way of the better. His task was clear-cut, given the current state of the economy. As he put it, "all the engines of the economy are running at nearly full speed". As a good driver, therefore, the Finance Minister has wisely neither changed gear nor direction but has simply sought to hold the vehicle steady.

The Budget has followed an uncomplicated strategy. It has used fiscal incentives to sustain growth in production and consumption and used Plan allocation to ensure equity and fair distribution to ``bring the greatest good to the greatest number''.

The current year is likely to close with an estimated growth of 6.9 per cent over 8.5 per cent registered last year. With the growth impulses provided by the Budget, the country may well ratchet on to a higher growth trajectory of 7-9 per cent in the coming years. The key, the Budget has rightly recognised, to sustain this level of growth will be a substantial improvement in physical and financial infrastructure.

In an innovative effort to narrow the `infrastructure deficit', the Budget has proposed the creation of Special Purpose Vehicles (SPVs) to implement large infrastructure projects in the roads, ports, airports and tourism sectors by using the foreign exchange resources available.

The SPVs will lend funds, especially debt of longer term maturity, directly to the eligible projects to supplement other loans from banks and financial institutions. There will be an annual cap on such funds starting with Rs 10,000 crore for the next fiscal. The main beneficiary, one hopes, under this scheme will be the metros and large towns where the state of infrastructure is crying for immediate improvement. One wishes the Finance Minister had placed equal emphasis on power and water supply projects.

A similar plan has also been proposed for the rural sector. The new scheme, `Bharat Nirman', is said to have been conceived as a business plan, to be implemented over four years, for building infrastructure such as irrigation, roads, water supply, housing, rural electrification and rural telecom connectivity. The scheme is likely to set bold targets for itself. The successful implementation of this scheme would not only give a huge boost to effective demand in the rural areas but also cut down considerably the exodus of rural poor to the urban centres.

Underscoring the pivotal role of the banking sector, the Budget rightly observes that ``the incipient investment boom in infrastructure, industry (including housing), and services needs to be nurtured through further reforms in the financial sector''.

The Budget proposes changes in relevant laws to prepare banks to meet the Basel-II norms which will come into force in the course of the next two years. Changes have also been proposed to the statutory reserves and share capital of the banks. The Budget has deferred or delayed such contentious issues as merger and amalgamation among public sector banks and the question of FDI control over private banks. However, the Finance Minister has indicated that the RBI will unveil a roadmap for banking reforms based on universal principles of competition, consolidation and convergence.

There are no two opinions about the need for consolidation in the banking sector. But clarity is needed on what is sought to be achieved. Merely merging the existing public sector banks to create fewer such outfits need not necessarily be for the better.

The goals of consolidation should sub-serve the felt needs of the country. The banking system we need for India at this stage of development is one that can lend more, wisely and at a lower cost. These imperatives cannot be addressed by mere consolidation. Therefore, it is essential that before we have a roadmap, we musthave a clear game-plan of what we want to achieve.

The idea of developing Mumbai as a regional financial hub has been mooted in the past but nothing was done. The Budget proposes to appoint a High-Power Expert Committee to advise the Government on how to go about this. The Government would do well to look east to Singapore, Hong Kong and, now, China for inspiration.

A `mild tax' purportedly to tackle black money has naturally raised the hackles of the banking customers. Any withdrawal of Rs 10,000 in cash would attract a tax of Rs 10. However good the intention behind this tax, it is bound to lead to a lot of resentment, particularly among the middle-class customers.

In the rural areas, branch managers will have a tough time convincing customers. The menace of black money cannot be tackled by policing the banks. If it cannot be tackled, it has to be lured into economic and social activities through incentives and strict tax administration.

In the area of rural credit, the Budget proposes to explore the possibility of allowing banks to adopt the agency model, by using the infrastructure of civil society organisations, rural kiosks and village knowledge centres, to provide credit support to rural and farm sectors. It is worth a try. But the fundamental problem in rural finance is not so much accessibility of credit as lack of adequate bankable schemes. The civil society organisations should first explore how to link the insatiable urban demand to rural employment and business.

Similarly, there is a proposal to make micro finance institution "banking correspondents" to provide transaction services on behalf of the commercial banks. The Finance Minister also proposes to request the RBI to permit qualified NGOs engaged in micro-finance activities to use external commercial borrowings. It is a welcome move which underlines the crucial link established NGOs can provide in promoting rural economy.

(The author is an economist with Indian Overseas Bank and can be contacted at dvenu@vsnl.net)

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Funding infrastructure

Budget: No change in gear or direction

How to create a new tomorrow

Thou shalt not do what's not permitted

Resolving disputes

NBFCs — creditable but unrecognised role