The Hindu Business Line : Budget: High on intent, low on action

What does the Budget have to offer the common man vis-à-vis his basic bread and butter issues? One curious feature of the economy in recent years has been that prices of luxury items have been falling while that of necessities rising. The Finance Minister is confident of achieving 10 per cent GDP growth, but there are no major initiatives to raise investments to reach that level, says A. SESHAN.

THE FINANCE Minister, Mr P. Chidambaram... Points to ponder over in the Budget aftermath. — Kamal Narang

The first impression on the completion of the Budget Speech was that it is in line with the current trends in the economy lest it rocks the boat. One curious feature of the economy in recent years has been that prices of luxury items have been falling while that of necessities rising. And this is an economy where, even according to official statistics, nearly one-fourth of the people live below the poverty line.

The Economic Survey acknowledged its disquiet over the rising food prices. So many years after the Green Revolution the country is still thinking of importing wheat to contain prices.

What does the Budget have to offer for the common man vis-à-vis his bread and butter problems? Production and prices are no doubt closely related.

Is there anything in the Budget that would go towards improving productivity in any sector? There was some talk about R&D being given encouragement in agriculture or industry. There is no reference, even for the sake of form, to the need to raise productivity.

Farm expenditure

Agricultural growth for the current year is estimated at 2.3 per cent. It is just enough to cope with the population growth. Will short-term farm credit, even if doubled to meet the target, do the trick of accelerating agricultural growth to 4 per cent as proposed?

The Finance Minister says it is possible to reach the GDP growth rate of 10 per cent. But one does not find any major initiative in raising the investment level to reach that target.

There are estimates of expenditure for infrastructure projects and so on but will they add up to ensuring a growth rate of 10 per cent next year?

Despite the brave talk in the past about the economy becoming resilient to the vagaries of the monsoon one still finds the government blaming nature for decline in agricultural output.

In a vast country like India one cannot expect agricultural conditions to be normal everywhere in any one year. The strategy should be to frame a plan for contingencies.

Only around one-third of the total expenditure is earmarked for the implementation of the Plan and could be considered to be contributing to investment and growth. Non-Plan expenditureis also important.

But one knows that the status of maintenance of infrastructure is poor despite annual expenditure thereof as is evident from the condition of the roads post monsoons even in a city like Mumbai.

The money drain is a serious problem. Of course, one does not expect the Budget speech to deal with the question of implementation of projects. But there is nothing to indicate in any other document either as to how the government proposes to deal with the problem of effective implementation of its Plans.

To modify an oft-quoted statement of the late Hugh Dalton, the Chancellor of the Exchequer in the UK, economy means getting 100 paise worth of goods and services for every rupee spent. It would rule out any leakage of the type that Rajiv Gandhi once referred to.

RBI support

The estimates of revenue and fiscal deficits do not signal a dramatic change. But one major point that the Finance Minister should have referred to is the implication of the law prohibiting, except under unusual circumstances, the Reserve Bank of India (RBI) from providing support to the government in the primary market for its securities with effect from April 1. Even the RBI remained silent on this matter in its latest Review of Credit Policy.

In the last few weeks there has been a squeeze on liquidity with the call money rates hovering around 7 per cent. A few banks have raised interest rates for both deposits and lending to deal with the situation. Probably others have been waiting for the Budget.

In the light of the continuing liquidity problem, how is the Government going to meet the borrowing requirements sans the RBI support? If banks, insurance companies, etc., have to provide the support, the interest rates will have to go up.

In this context the directive to banks to lend to farmers at 7 per cent up to a ceiling of Rs 3 lakh is contra-indicated.

Agricultural credit is a subject that has been flogged for more than a half century but no viable solution has been found so far. Having been used to usurious rates of interest, the small farmer is unlikely to be elated by the decline in interest by 3-4 per cent. What he wants is credit when he needs it. Directed credit is still part of the ethos of policy making despite protests.

Banks and mutual funds

The inclusion of fixed deposits in banks with a maturity of five years for deduction from income under Section 80C has been done to address bankers' grievance that they are losing out to others in mobilising savings such as mutual funds.

There is no level playing field as, for the other eligible schemes, the lock-in period is only three years.

But the fundamental question is whether the success of mutual funds in mobilising savings is at the expense of banks. What does a mutual fund do with the cheque that it receives from a customer as subscription towards a scheme?

It deposits the cheque in its own account in a bank although it may be a different one.

In other words, the money returns to the banking system.

In fact, it never leaves the system unless the money is absorbed by the government or the central bank or as payments abroad. Banks may even be gainers in the process.

While the customer may be a drawing a cheque on his savings account on which interest is paid, the mutual fund will keep the money in the interest-free current account.

The reason for the recent liquidity crunch is that the Government has not spent the money it has collected and is building up balances with the RBI. This is apart from the damage caused by the redemption of the India Millennium Bonds.

The other proposals, or even non-proposals, are welcome. Thus, there is an attempt to reduce indirect taxes. Direct taxes have been more or less left untouched with some relief to corporates in respect of the Fringe Benefit Tax.

Mercifully, the Budget is silent on the introduction of the Exempt Exempt Tax method, although in the subsequent press conference the Finance Minister indicated that there would be a gradual transition towards it.

(The author is a former officer-in-charge in the Department of Economic Analysis and Policy of the RBI.)