The Hindu Business Line : Budget 2004: Will resources match aspirations?

The emphasis of the Common Minimum Programme is on the farm sector, labour welfare, PSU privatisation policy and social areas of education and health. Nobody can dispute the importance of these sectors when globalisation during the past ten years has not adequately addressed the core issues. But with huge investments involved, where is the money going to come from?

HOW much flexibility does the Finance Minister, Mr P. Chidambaram, have in raising resources in the Budget for 2004-2005 to meet the objectives of the Common Minimum Programme? No doubt, the CMP's objectives have to be fulfilled over a period of five years, but even a beginning would cost the exchequer a substantial sum. The United Progressive Alliance has to demonstrate its intentions and commitment to the CMP if it has to win credibility with the people. This would mean some impact-making investments in critical areas. The CMP actually brings some welfare concepts to the reform process — generally referred to as "reform with a human face."

Broadly the CMP's emphasis is on agriculture and the plight of agriculturists, labour welfare, PSU privatisation policy and social areas of education and health. Nobody can dispute the importance of these sectors when globalisation during the past ten years has not adequately addressed the core issues. However, the investments involved will be huge.

Farm sector

The Finance Minister has to find something like Rs 30,000 crore for public investment in agriculture this year, mainly for water conservation and irrigation projects, augmenting post-harvest technologies and improving road connectivity from farms to markets. Non-farm employment is another major area of concern.

Besides the government, private sector organisations involved in textiles, food processing and agro inputs can play a useful role here and that can happen only if there is sustained demand growth. Demand in these sectors has been sluggish, unlike in the auto sector.

Power and infrastructure

The first necessary condition for employment generation in old economy sectors is to boost the manufacturing sector, which has seen some recovery in the recent past. How can industrial recovery or, for that matter, any recovery, including in the service sector, come about without improving infrastructure? Poor infrastructure is the Achilles' heel of India's economy. Power is the most critical, and needs an investment annually in generation alone of Rs 30,000 crore. Transmission and distribution are other areas calling for huge investments.

Total investment in infrastructure — including by the private sector, as in telecom — may well be of the order of Rs 50,000-60,000 crore annually. This will still leave out major water schemes for urban and rural areas. Where is the money for all these sectors going to come from? Not entirely from taxation, even with better tax administration, which can produce, at best, an additional 20,000 crore.

Part of the amount can come through plugging energy thefts and losses, which are as high as 40 per cent in some States. Collection of user charges should be considered. Will these ideas be acceptable to the Left parties and indeed to other alliance partners, apart from sections of the Congress party itself?

The Finance Minister has to do tight-rope balancing, with an eye on containment of fiscal deficit. Defence may need a higher outlay, say around Rs 75,000 crore for revenue expenditure and modernisation programmes.

Beyond the Budget, it is likely that the Finance Minister will come up with a voluntary disclosure scheme to draw out black money but this has to find acceptance by UPA, constituents, particularly if tax rates are made more favourable. There may be no great prospect of money flowing in from the disinvestment route, given the Government's defined position on this issue.

The concept of public-private sector cooperation had its origin in resource-pooling. Part of the foreign exchange reserves of $119 billion can be used to set up new power facilities and modernise State electricity boards quickly, along with the setting up of regulatory authorities in States where they do not exist.

The Finance Minister should announce a systematic study of power tariff fixing so that it is equitable and just for producers and all sections of consumers. The major areas of policy orientation mentioned in the CMP fall in the State list or concurrent list. Therefore, any changes contemplated will have to be done in consultation with the State governments.

Wider tax net

The 8-10 per cent GDP growth aimed for will be a major trigger for income growth and demand stimulation. Agriculture, representing 30 per cent of GDP, is practically outside the pale of taxation. Trying to expand the tax net to include the service sector needs to be explored, but the major problem here is the type of services still outside the net may be widely dispersed and confined to small or medium operations.

The TDS route may be a cost-effective way to tax this sector but monitoring the results by plugging loopholes still needs to be done. Moreover, is it worth extending service tax to small operations, although aggregatively it may look attractive?

A floor level exemption on business turnover basis needs to be considered. Ultimately, one finds that the burden of tax collection has to be borne by individual income-tax payers and corporate tax assessees.

Farm credit

Mr Chidambaram has fixed the rural credit target of Rs 1,04,500 crore during the current financial year to be shared between commercial banks, regional rural banks and cooperatives. Loans may be rescheduled without waiver of interest. Agriculture needs special attention in view of the extreme distress faced by farmers following drought. It is also a sector where public investment has been lagging behind. Except for commercial agriculture, private investment in this area is almost nil.

The Finance Minister has indicated in a recent meeting of the UPA that the structure of interest rates, including that on EPF, will remain as it is. Although not a budgetary measure (being under Reserve Bank's purview) it helps in sending the right signals to industry.

But there may be little room to reconcile the interest of depositors, including senior citizens, particularly when the Left parties have unequivocally called for increasing the rate of interest on EPF and other contractual savings.

The Employment Guarantee Scheme is another area that will involve enormous outgo with no precise estimates being available. Job reservation in private sector is no answer to this problem.

Another gigantic task, requiring at least Rs 20,000 crore, is setting up primary and secondary school facilities in rural and urban sectors. The planned education cess, at 2 per cent on all Central taxes, with a yield of Rs 6,000 crore seems very attractive. Community funding, with matching grants may be looked at, as it might inculcate a sense of dedication and responsibility in community members to bring about effective results.

Seeing that funds are properly used, without corruption or siphoning off moneys earmarked for a purpose, is a daunting task. Involvement of women in the project may produce good results as they are directly affected by lack of educational facilities. China, for example, does not only have better enrolment in schools but a better pass-out ratio. Indian industry can help by setting up schools or contributing to building and infrastructure facilities and connecting school education to training in various skills that are in short supply. Both in the education and health sectors, the Government should develop workable models for community participation and management, especially through credible NGOs. The UNDP has launched a model for community health financing in Karnataka which is reportedly functioning reasonably well.

Social security

While a "hire and fire" policy must be eschewed, there has to be a social security net for those who are out of employment. This would involve large amount of money and can be mobilised only through labour sharing part of the burden. This can come partly from government funding and in part from contribution by workers while in employment. EPF is not the complete answer.

Suitable legislation with the consent of labour organisations must be introduced. These measures still leave out the fate of some 370 million workers in the unorganised sector and farm labour. No one knows how to insulate this section from the hardship of unemployment. Using the huge foodgrains stock for food-for-work programmes can be a classical remedy in which India has adequate experience. This might also create additional rural assets.

Industry

The Budget should also give some relief to industry and send positive signals to foreign investors,.

There have been reports in some sections of the press that, among other things, industry is demanding a reduction in the corporate tax rate from 35 per cent to 30 per cent, exemption of dividend tax both at the time of distribution and in the recipients' hands, exempting long-term capital gains tax on equities for all listed companies, withdrawal of minimum tax provision under Section 115JB, and rationalising depreciation provisions under the IT Act.

All in all, Mr Chidambaram has the unenviable task of mobilising resources to at least partly meet the objectives of CMP. While one year's Budget cannot solve all his problems, the commitment of coalition partners to the CMP and involvement of potential beneficiaries could see progress towards the goal of reforms with a human face.

(The author is a New Delhi-based management and financial consultant.)