The Hindu Business Line : The arithmetic of the Budget

INDIA is perhaps one of the few countries where the Budget is still looked upon as a panacea for all economic ills. Come Budget time, our expectations of the Finance Minister slaying the evils of our country soar. In the interest of full disclosure, here are some simple arithmetic on the Budget.

The first issue, will the Finance Minister succeed on tax projections? A closer look (Table 1) shows that the Finance Minister has always been an aggressive votary of tax projections. During his tenure as Finance Minister, the budgeted tax projections have been consistently high. The actual growth in tax revenue, however, has been consistently lower in all the years, leading to a shortfall of 0.9 per cent of GDP in 1998.

The bright side is that apart from 1998, tax collections were impressive in 1997 (aided by the Voluntary Disclosure Scheme) and 2005 (when it crossed 20 per cent).

Next, how feasible is the projection of GDP growth for 2006. The Budget has underlined the nominal GDP growth for next the fiscal at 13.6 per cent. In such an eventuality, there can be three scenarios regarding the real GDP growth in 2006 (Table 2). Scenario 1, assuming that the real GDP growth is 7.5 per cent and the industry and the service sector grow at the same rate in 2006 as they did in 2005 (unlikely to happen), agriculture would need to grow at 3.6 per cent. Scenario 2, keeping all others unchanged, if we increase GDP projection to 8 per cent, the agriculture sector would need to grow at 6 per cent.

Scenario 3, if agriculture, industry and service sectors are projected to expand at the trend growth rate over 1995-2005, GDP growth will be 6.6 per cent in 2006.

The bottomline is that agriculture needs to grow at a much faster pace in 2006 to achieve the GDP growth rate close to 8 per cent. Interestingly, the 7-8 per cent growth for 2006 is likely to result in a higher than average rate of inflation (6-6.5per cent).

As for the decline in bank credit to agriculture, the Finance Minister has kept his promise of implementing the recommendations of the Task Force that was set up in August 2004 to examine reforms in the co-operative banking system. The recommendations, although commendable, include providing financial assistance to bail out ailing co-operative banks. It is not clear where this money will come from (co-operatives are a State subject).

The Budget emphasises the importance of micro-finance as a key for credit assistance for the urban poor. In fact, during 2003-04, around 3.62 lakh new Self-Help Groups (SHGs) were added to the credit linkage programme within the banking system.

Against this background, the Finance Minister's proposal to cover around 2.5 lakh new SHGs in 2005-06 is eminently feasible, though the figure is much lower than that what was achieved in 2003-04. Interestingly, while the projected demand for micro-finance is estimated at Rs 40,000 crore, the current exposure of commercial banks to SHGs is a negligible Rs 3,900 crore.

There are two things that the Budget fails to address regarding agriculture. One, it does not have specific provisions for the reform of the Public Distribution System and second, it is silent on the decline in the share of agri-exports and ways to check this trend. In the social sector, allocation for health and family welfare is budgeted at Rs 10,280 crore for 2005-06 against Rs 8,420 crore in 2004-05.

While this is welcome, the fact is that as a percentage of the Central Plan outlay for the social sector, the allocation for health 2006 is lower than what is was in 2004-05.

But perhaps, the most interesting aspect is that these allocations are net of recoveries on expenditure.

For instance, gross of recoveries, the allocation on health and family welfare actually shows an increase from Rs 9,807 crore to Rs 12,022 crore over the same period.

On education, the Finance Minister has proposed to increase the allocation for Sarva Shiksha Abhiyan to Rs 7,200 crore in 2005-06 from Rs 3,100 crore in 2004-05. While the measure to strengthen primary education is laudable, the silence on public-private initiatives in technical education causes concern.

Finally, a word on employment. India's employment elasticity (change in employment for change in GDP) declined to 0.13 in 2000. So, even if we attain GDP growth of 8 per cent, addition to employment would be no more than 10 lakh per annum.

Considering this, it remains to be seen how this Budget will provide the big push to employment generation that it promises.

(The author is an economist with ICRA. The views are personal.)

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