The Hindu Business Line : Will it meet its objectives?

Defeat in State Assembly elections, the detention of Quattrocchi in Argentina and the crash of the stock market after the meltdown in China were like a hat trick in adversity as the background for the government to present the Union Budget. The overriding factor that must have exercised the Finance Minister's mind was how to achieve sustained growth of the economy without inflation.

One can judge the quality of the document by looking at this objective. Only a detailed study of the Annual Financial Statement, as the Budget is technically known, and the supporting documents will reveal how well the target will be met.

Growth is a function of investment. But to sustain growth it is not enough if the country has a high investment rate. It has to be rising year after year. From the raw figures available in the Budget it is difficult to know if the investment expenditure that will contribute to net capital formation. And an equally important part is played by the private sector. Will the proposals accelerate private sector investment?

Recent months have seen a considerable spurt in the investment plans of many domestic and multinational companies. Will they fructify in the coming years and result in further investments? The reaction of the industry and the stock market makes one doubtful on this score.

Sore Points for IT

The rise in dividend distribution tax will be a sore point and the implications for the IT industry are unhealthy for the one sector that has contributed so much to the economy in so many ways. One may expect some modifications in them during the debate in Parliament considering that the net result of all the proposals, including the concessions in excise and Customs duty, is a gain in tax revenue of only Rs 3,000 crore on the direct side, their being revenue-neutral for indirect taxes. Whether the banning of the futures markets in wheat and pulses will help control their prices is a moot point. The futures market factors in demand and supply variables, though there could be an element of speculation. The stock position of the two commodities is low. In fact, in wheat, the buffer stock is such that it may run out soon unless there is substantial procurement in the next month or so. But the peak of the marketing season comes in April and moving the stocks to the distribution system takes time.

There is also a serious deficit developing in oilseeds supply and efforts for imports need to be made without delay. It is the food prices that will set the psychological tone for inflation despite their low weightage in the Wholesale Price Index. All in all it is going to be a long hot summer for the government in managing the economy. Among the good proposals are the ones relating to agriculture, health and education with substantial hikes in expenditure.

Good Use of Forex

The government has accepted one of the recommendations of the Parekh Committee to use a small part of the foreign exchange reserves for infrastructure development without the risk of monetary expansion. The Committee has suggested the establishment of two wholly-owned overseas subsidiaries of IIFCL with facilities to borrow from the RBI and lend to companies for the purpose and also to invest the forex in highly-rated collateral securities for getting a better return than now.

These are ideas articulated for many years and it has taken so much time for the idea to sink in! However, it is worth considering whether the RBI could refinance forex loans for infrastructure advanced by commercial banks instead of the establishment of a subsidiary for the purpose. In fact, one does not understand Indian banks raising huge amounts abroad for strengthening their capital to observe the Basel II capital standards. Cannot the central bank make the money available with a suitable amendment to the RBI Act?

The advantages are obvious. There is no forex expenditure on paying interest to foreign lenders. Second, the foreign exchange will remain in the country.

Differential interest

The Differential Rate of Interest (DRI) scheme provides finance at a rate of 4 per cent to the weaker sections engaged in gainful occupations and a target of 1 per cent of outstanding credit was set for banks along with other measures during the time of Indira Gandhi.

Those who have seen the working of the scheme at the field level know that it is a scheme for the clever borrower to recycle bank loans as term deposits, earning arbitrage income in the process. Now the Finance Minister has revived the idea and proposes to raise the limit of the loan from Rs 6,500 to Rs 15,000 and the limit of the housing loan from Rs 5,000 to Rs 20,000 per beneficiary. This is a good preparation for the Assembly elections in the remaining part of the year!

(The author is a former Officer-in-Charge of the Department of Economic Analysis and Policy, Reserve Bank of India.)