Redefining reforms

The Budget is expected to be a pace-setter in the pursuit of economic reforms with a "human face" and Dr Manmohan Singh, the architect of India's economic liberalisation, points out that economic reform is not only for freeing private enterprise from the shackles of bureaucratic control. Indeed, he has promised a reform programme which will be a model for the rest of the (developing) world.

Accordingly, growth — in which both the State and the private sector have complementary roles — must create employment opportunities and advance social equity.

But private sector-led growth is the dominant refrain in the policy prescriptions and conditionalities of the IMF and the World Bank. The State, as the Prime Minister said in his address to the nation on June 24, has to provide not only basic social services and facilities but also, in large part, for a country such as India, economic infrastructure — irrigation, power, roads and railways. His government would give immediate priority, he said, to reform of administration and public institutions for effective delivery of pubic services.

While moving forward on its socio-economic agenda, the Government will maintain "a high degree of fiscal and financial discipline and a robust external economic profile". This should allay the misgivings abroad that resource requirements for the CMP would imply higher fiscal deficits and public debt.

New priorities

The decks have been cleared for the Budget with the announcement in advance of a major package for farmers indicating the first steps under way to double the flow of rural credit in three years and to extend debt relief for small and marginal farmers in distress due to drought and borrowings from money-lenders.

Bank and other institutional lending in the current year will be increased by 30 per cent. All this will not impact on the Centre's Budget. The accent on social priorities (education and health) besides agriculture, employment and infrastructure, "selective" approach to privatisation and a strong role for the public sector, as well as commitment to reducing revenue deficits, all of which will get reflected in the Budget, has naturally raised serious doubts about Government's ability to find resources. There may also be concern that even the Government's limited reform policies may be hamstrung by the Left.

The buoyancy in tax receipts in 2003-04 underscores the demand revival and rising corporate profits. With economic growth anticipated at not less than 7 per cent, the Government can rely on a steady rise in tax revenues. The Budget will also focus on clearing hurdles to private investments. It will spell out the Government's liberalised approach to foreign investors, direct and portfolio, and also the incentives to attract a larger flow of investments in the economy.

Foreign investment

The Finance Minister has said that tax and other policies will be deployed for the orderly development and functioning of the capital market. There will be special emphasis on attracting larger foreign investments, direct and portfolio, given the interest in Indian equity market for foreign institutional investors (FIIs) which invested over $11 billion in 2003/04.

It remains to be seen whether Mr Chidambaram will also embark on some creative moves to utilise the build-up in foreign exchange reserves for a boost to investments in the economy. Privatisation or mergers and acquisitions had over the last decade given a thrust for cross-border foreign investment flows but privatisation can by no means become a sole determinant for a country's attractiveness for FDI.

Even here, the UPA Government has made it clear that disinvestment in public undertakings, including profit-making ones, will continue though the Government will hold the majority (51 per cent) in such enterprises as are profitable on a sustained basis and can withstand global competition. It will, however, not disturb the public sector dominance in the navratna undertakings.

The Budget is, therefore, expected to rely to a significant extent on capital receipts from disinvestments. The Finance Minister will certainly carry forward deregulation wherever necessary to ensure robust growth for the industrial sector and incentives to boost private investment as well as public-private partnerships in infrastructure will be introduced.

Tax policies

While there are expectations of the levy of a special cess for education, tax reforms will be largely confined to widening the base without upsetting the stability and simplicity of the tax structure, and to removing several exemptions in vogue. Rate revisions are unlikely at present, given the need for resources for the rise in public investment.

For investors, the Finance Minister may announce a modified scheme on taxation of capital gains.

He may re-visit articles which had been tax-exempt depending on the class of consumers to balance revenue loss where duty reductions are provided for. But the general thrust would be toward greater uniformity with three or four rates as at present. There is expected to be a substantial effort to extend the service tax to more services as this sector contributes more than 50 per cent of GDP.

This may become the major route for additional resource mobilisation in the Budget. The Government has been relying on a growing volume of non-tax revenue and the rise in profits of public undertakings, including banks will yield more dividend to the exchequer. Fiscal prudence demands that the Government progressively bring down its market borrowings and this will be helped by a reduction in the revenue deficit. With the rate of inflation rising to 6 per cent by mid-June, a further lowering of small savings rates (which has hit savers, especially senior citizens) is unlikely. On the other hand, price pressures are expected to mount with the revision of petroleum product and coal prices, which will have a cascading effect, and this can lead to a firming up of interest rates during the year.

However dexterous the framework of the Budget, with the best economic brains of the Prime Minister and the Finance Minister behind it, it has to respond to the aspirations of the country at large. It has to be a Budget, with workable initiatives, which would enthuse farmers and unorganised sectors and the common man.

(The author is a former Chief News Editor of PTI.)

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