The Hindu Business Line : Balancing prosperity with stability

The Finance Minister will have to necessarily find a way to satisfy the demands of the various sectors of the industry to increase their competitiveness. Equally important is a sharper focus on agriculture as the country is paying a
heavy price for the neglect of the farm sector in the
recent past, says S.VENKITARAMANAN.

Come February 29, the Finance Minister, Mr P. Chidambaram, will unveil his Budget, on which rides a lot of expectations. As I had said in these columns two weeks ago, the Budget will have to deal with the potential impact of a likely US recession.

The decisions announced in the Budget can only have a long-term impact in as much as they refer to the tax policy. Taxes take time to impact the behaviour of people. At the same time, they can influence markets, which can, directly or indirectly, influence investment prospects. Corporates look to the Budget as a signal as to whether it encourages local competitiveness.

What are the options before Mr Chidambaram? The Finance Minister has had to observe the conditions laid down under the FRBM Act. In the medium-term fiscal framework, which he has produced in connection with the current year’s Budget, he has committed himself to reducing the revenue deficit to zero and the fiscal deficit to 3 per cent in specific periods of time.

The framework also points out that the tax/GDP ratio has been increasing, albeit marginally to around 11 per cent. Given the commitment to reduce fiscal and revenue deficit, the Finance Minister faces a challenging task to meet the objective of economic growth through a fiscal stimulus. His hands are further tied because of the expectations arising from the Common Minimum Programme of the UPA.

The expansion of schemes such as the National Rural Employment Scheme calls for larger outlays. There is also the need to fulfil the investment requirements of the Eleventh Five-Year Plan. It is not easy to handle the twin objectives of fiscal deficit containment and enhancement of growth in a pre-poll year.

Populist theme likely

The theme of the Budget is likely to be populist. The Finance Minister will have his eye on satisfying various sectoral and regional interests, who have pleaded with him for concessions. Concessions cost money and conflict with the goal of containment of fiscal deficit. The Finance Minister has limited scope for increasing taxes, a step that is likely to be counter-indicative for the poll strategy.

I believe that containment of expenditure on the establishment side will meet with severe resistance since all departments of the Government are in expansionary mode. There is also the constraint that the Pay Commission’s recommendations are due. If they are, as expected, generous to the employees, they will not be fair to the fisc.

In the light of the rising level of emoluments in the private sector, Government will find it difficult to resist the push and pull of Government employees for meeting the principle of fair comparison. Many employees will find it attractive to exit. Of course, opportunities to Government employees to exit to the private sector are limited by the willingness of the corporate sector to absorb them.

The Finance Minister will have to necessarily find a way to satisfy the demands of the various sectors of the industry to increase their competitiveness. This may call for adjustment in customs duties as well as excise duties. To what extent he will be able to do this, keeping in mind the need to observe compliance with WTO rules, is debatable.

Focus must on agriculture

One of the important sectors on which the Budget will have to concentrate is agriculture. The country is paying a heavy price due to comparative neglect of the needs of the farm sector in the recent past.

The yields of foodgrains have not risen. The production is not adequate to meet the growing demands of the increasing population. This is likely to lead to a potentially inflationary crisis, even though Government is trying its best to import the balance from Australia and the US. But, this is difficult in view of the rising prices of food grains in the world as a whole. The farm crisis is one that cannot be solved merely by budgetary provision.

There has to be an integrated policy on the lines suggested by Dr M.S. Swaminathan in his report to the Government. Excellent as the report is, it needs to be supplemented by concrete and integrated action on the input supply front.

Fertiliser shortage

Importantly, the country is presently faced with a rising shortage of necessary fertilisers. This is because of the lack of an adequate policy response to the legitimate demands of the fertiliser industry to provide reasonable compensation for increased cost of production.

This failure is typical of a ‘penny-wise pound-foolish’ policy under which the fertiliser industry is compelled to sell well below its cost of production while its costs are increasing.

If the Government wants to satisfy farmers by keeping the sale price low, there is no alternative except for the Government to absorb the difference between the cost of production and sale price. The present mechanism for determining this subsidy has failed to induce extra production. In effect, there is a false air of complacency in Government circles that we can import fertilisers from oil-rich countries. This will detract from food security — as risky as our dependence on import of food grains.

Improved lending practices

It has been the practice of the Finance Minister in recent Budgets to attempt to satisfy the various sections of the people by drawing their attention to banks, which will lend funds. This amounts to transferring the liability from the shoulders of the Government to banks.

To what extent such “directed” lending will succeed depends on banks being allowed to charge reasonable rates of interest. This calls for an approach that should not confine itself merely to quantitative targets but also qualitative improvement in lending practices.

The Budget can only indicate the lines of policy change. It is for the central bank and the State Governments to implement these changes. Unfortunately, the recommendations of the Vaidyanathan Committee on cooperative banking have not yet been fully implemented.

All a gamble

Ultimately, the Budget has to meet the requirements of a number of constituencies — mostly domestic. There is also the important element of foreign investment group. Their appreciation of the problems of India may be different from that of the Finance Minister or the local public. The Finance Minister, however, seeks the approbation of foreign groups, which influence the desired flow of investment into India.

Whether the markets will give the vote of approval depends on how the local corporates and the foreign investing entities respond to the cues of the Budget. After all, the Budget is a gamble — a gamble, however, with good intentions.

The Finance Minister is embarking on one of the most difficult exercises in his career — to satisfy the common man as well as uncommon investor.

Let us hope that for the country’s sake Mr Chidambaram has good luck on February 29 delivering a Budget that ushers in prosperity together with stability.