The Hindu Business Line : Path-breaking Budget on an inclusive route

Recognising that agriculture cannot support the entire rural population, the Budget focuses on the need for people to be re-skilled and made employable in other sectors.

V. Kumaraswamy

The latest Union Budget is path-breaking in more ways than one. It is the first serious effort at bringing in a welfare orientation to the annual exercise. Although that was the aim in the socialist years, very little was achieved as there was hardly any money in the kitty. For the last 15 years or so, the Government has been fixated on growth in the industrial and urban sectors, resulting in a large section of the population feeling left out.

The growing disaffection and disillusion with the policies, reflected, in part, by fast-spreading naxalism, must have been as impressive as our economic growth, if only it had been measured regularly. The Budget refocuses its programmes and expenditure towards the vulnerable sections, if allocation and schemes in the Budget are to serve as evidence.

A rupee in the hands of a person living below the poverty level is bound to have many times its value (marginal utility) than when it is in the hands of a rich man, even if the latter can multiply it faster. To put it rather simplistically, if a rupee gets transferred from the rich to the poor, the total welfare in the economy is bound to go up.

Loan waiver

The Rs 60,000-crore subvention is bound to have many times its value in the needy farmers’ hands than in the hands of those who contribute to the Budget revenues. Even if the Finance Minister had taxed this amount away from others, it would have still added enormously to the nation’s total welfare.

To hazard a guess, the welfare created by this one single measure (the amount itself is monumental in proportion) will well be over the entire Budget size. Surely, no one deserved this sop better then those targeted by the Budget. One hopes that the government machinery follows it up with leak-proof delivery.

There is the sour-grapes sounding ‘moral hazard’ argument being raised against this farmer rescue package by the righteous ones. It is actually an act of force majeure. Even commercial contracts are excused due to supervening impossibilities and acts of God. Most of the farmer defaults have arisen out of droughts and crop failures for reasons beyond anyone’s control.

To say that those farmers who commit suicide unable to bear the shame or hunger would feel tempted to become habitual defaulters, expecting government rescues and periodic bonanzas, is a somewhat irresponsible allegation.

Even if there are those farmers who feel tempted, their proportion would be no different from that in the other sections, including the Government, politics, industry or other services afflicted with moral hazard problems. So, why hold it only against the farmers?

Inclusive growth

Second, the thrust is on inclusive growth. The Budget makes an honest effort at addressing the issues of the rural and agricultural sectors — both largely neglected so far — fairly comprehensively.

Increased allocation to primary education with increased focus on retention, the world’s largest mid-day meals scheme, increased allocation and coverage in the health sector, health insurance for every worker below poverty level, incentives for rural hospitals, and extending rural employment guarantee to the whole country are steps which will definitely sow the first seeds for inclusive growth.

Even if it falls short, it goes much farther than anyone has dared or cared so far. A few more Budgets of this kind, sincerely implemented with leakages plugged, will go farther in tackling naxalism than the increased use of force. The disaffected may see a ray of hope and return to the mainstream.

Third, we seem to have recognised at last that agriculture cannot support all the rural population. Hence the people need to be re-skilled and made employable in other sectors.

Although baby steps were announced 4-5 years ago, there is a renewed effort in this Budget with increased allocation, focus on partnership with private industry (so that end-use drives skill development, thus reducing chances of a mismatch and educated unemployment) and bringing a much wider variety of skills into the reckoning.

Growth stimulus

Fourth, the Budget seems to alter the balance between monetary measures and fiscal steps in managing the economy. So far the fiscal measures announced through the Budgets were largely focused on simplification, rationalisation, effective governance, increasing compliance, and liberalisation.

The growth stimulus came largely from opening up the economy to foreign capital, removing licensing and other hurdles in the way of economic activity and investments, however anaemic, in infrastructure.

Measures of stimulating investments were largely confined to income tax exemptions whose benefits accrued over the long term but measures of stimulating consumption in the short term through fiscal measures were largely unknown. These were the preserve of monetary policy.

All over the world, monetary policy has taken primacy over fiscal measures in containing inflation, stimulating growth (remember successive Fed rate cuts all the way from 7-odd per cent to 2-odd per cent in the Greenspan era), or even managing crisis like the sub-prime now.

The fiscal has been sidelined in a relative sense. This balance may be right for countries where monetary integration is high, and financial inclusiveness and the reach of formal systems that are amenable to control of the monetary authorities, near total.

But in India, where a sizable section is still on barter and the reach of formal systems rather poor, financial inclusion is still a distant dream, still leaving the task of getting out of the current difficult predicament of high inflation and growth which is beginning to flounder. The RBI has its hands full trying to contain inflation and, hence, could not have been expected to provide a growth stimulus.

The Budget correctly calls and has initiated several steps for maintaining growth. Cenvat reduction to 14 per cent, CST reduction to 2 per cent (and other sector-specific reduction of duties) and more money in the hands of income-tax assessees will lead to short-term stimulation of demand and break price hikes, even while not compromising progress towards long-term harmonisation and movement to GST.

It may serve valuable lessons to future Finance Ministers on using the fiscal to a far greater degree than generally used elsewhere in stimulating or cooling the Indian economy.

(The author works with a large paper company as CFO. The views here are personal. He can be reached at kumarviru61@yahoo.co.in)