The Hindu Business Line : Budget: Not in sync with times

Pointless and reform-hurting tinkering with tax rates and a lack of appreciation of the importance of manufacturing are illogical aspects of the Budget. While rejuvenating agriculture is urgent, no transformation of the sector is possible without rapid growth of industry. And the Budget contains no measures to unleash the market forces that assure the farmer a better price for his produce, says S. D. NAIK.

THE FINANCE MINISTER, Mr P. Chidambaram, seems to have missed an opportunity to present a forward-looking and path-breaking Budget. — Ramesh Sharma

The expectations from the Finance Minister, Mr P. Chidambaram's sixth (and the UPA Government's fourth) Budget were sky-high because of the booming economy and an unprecedented surge in revenue collections this year. Real GDP growth this year is estimated at 9.2 per cent and the average growth for the last four years at 8.6 per cent. Manufacturing growth for 2006-07 is estimated at 11.3 per cent. There has been a spurt in savings and investment, at 32.4 per cent and 33.8 per cent respectively. Exports are soaring and foreign exchange reserves have surged to $190 billion.

No Finance Minister in Independent India has been blessed with such favourable circumstances to present a forward-looking and path-breaking Budget to provide a further thrust to growth and equity. Unfortunately, however, the Budget turned out to a disappointment. It is lacking in direction and vision, whether in balancing growth with equity or helping carry forward the reform process.

NEEDLESS TINKERING

Most unfortunate is that the few positives have been completely overshadowed by the needless tinkering with the tax regime. Measures such as the hike in the Dividend Distribution Tax for companies, extension of the Fringe Benefit Tax (FBT) to employee stock options (ESOPs), and application of service tax to commercial property rentals are economically unsound and counter-productive, and clearly uncalled for.

The dual tax rate on cement defies all economic logic. The market price of any commodity is a function of its demand and supply as also its quality. The immediate impact was a further rise in cement prices as manufacturers sought to pass on the burden of additional excise duty on cement that is priced at more than Rs 190 per bag. The subsequent developments — the Government threatening to ban cement exports if the prices were not rolled back, and the industry agreeing to hold the price line for a year — are bad for the investment climate.

The FBT and the Banking Cash Transaction Tax introduced last year had become major irritants. This year more measures have been introduced to spoil further the sentiment at a time when individuals as well as the corporate sector were expecting some relief against the backdrop of the surge in tax collections — gross tax revenue having grown 19.9 per cent, 20 per cent and 27.8 per cent over the past three years. While all the new tax measures are expected to fetch no more than Rs 3,000 crore additional revenue, they have played havoc with the sentiment of the corporate sector and the stock market.

REFORMS SHELVED

At a time when the manufacturing sector is showing signs of true resurgence and promises to emerge a global manufacturing base for a number of products such as automobiles, auto-components, electronic hardware and pharmaceuticals, it needed to be provided a push. The general expectation was that the Finance Minister would carry forward the reforms process by reducing the tax burden on corporates and simplifying the tax regime. A moderate reduction in the corporate tax as well as excise duties would have helped boost manufacturing output, and the resultant reduction in costs would have made the sector more competitive. Instead, Mr Chidambaram preferred to advance the oft-repeated argument that the effective average rate of corporate tax works out to less than 20 per cent, after various exemptions. The truth, however, is that only a few large companies are able to claim such benefits. The others are at a disadvantage.

If one goes by the Finance Minister's logic, a better course would have been to do away with exemptions altogether and reduce the corporate tax rate to 20 per cent. That would have provided a level playing field to all segments , including small and medium enterprises (SMEs), and also helped move forward the much-needed reform process.

Instead of such a bold move, Mr Chidambaram once again preferred to tinker with the corporate tax regime by abolishing the surcharge on SMEs with taxable income of Rs 1 crore or less. Thus, there is almost nothing for industry in this Budget, only some negatives.

The imposition of price control on cement, the pressure on steel manufacturers to contain prices, and the ban on futures trading in certain commodities signify a return to the days of pricing controls. This will not only slow domestic investments but also send wrong signals to foreign investors. Panic responses to any rise in inflation are bound to be counter-productive as they will aggravate the demand-supply mismatch.

ROLE OF MANUFACTURING

Unfortunately, there appears to be an inadequate appreciation of the role of manufacturing at the current stage of country's development. In fact, in his post-Budget interviews, Mr Chidambaram compared the corporate sector to a strong oak tree and the agriculture sector as a plant that needs nursing. While no one would dispute the urgency and importance of rejuvenating agriculture, it needs to be emphasised that without rapid growth of the industrial sector, rejuvenation and transformation of the stagnating agriculture sector will not be possible.

Despite the current signs of resurgence, the share of manufacturing in India's GDP has remained almost stagnant at around 17 per cent over the past decade, even as the share of services has jumped dramatically. There is an urgent need to raise manufacturing's share to at least 25 per cent and increase job opportunities in the sector by providing special incentives to employment-intensive segments.

Unless the current unacceptably high excess labour in the agriculture sector is reduced significantly by creating alternative job opportunities in manufacturing, it will not be possible to increase productivity levels in the farm sector.

Widespread unemployment and poverty and the very large labour force engaged in agriculture underscore the importance of raising the share of manufacturing in GDP to create more job opportunities. Unfortunately, the Budget has failed to provide any policy support to the sector to enable it to accelerate its growth.

MAKING GROWTH INCLUSIVE

In his Budget speech, the Finance Minister stressed the need to ensure faster and inclusive growth. However, his roadmap is unlikely to provide relief to the weaker sections in the near term. As Prof Shankar Bhide of the NCAER puts it, it seems much more of an expenditure budget than a growth one. The focus on health, education and the rural areas could be a long-term stimulant but is unlikely to provide relief to the poor in the near term.

Increased outlays on agriculture and the social sector are welcome features. However, as in the past, transforming outlays into outcomes may remain elusive since most of the programmes have to be implemented at the State and local levels. What the farmers need is a better price for their produce but the Budget contains no measures to unleash the market forces to ensure this.