The Hindu Business Line : Walking a tightrope

“We must produce wealth, and then divide it equitably. How can we have a welfare State without wealth?” said the Finance Minister in his Budget speech which had little surprise. His proposals sought to address a host of economic and social issues while maintaining fiscal consolidation efforts.

With revenue deficit/GDP at 1.4 per cent, in the revised estimates for 2007-08, brought down to 1 per cent in the Budget estimates for 2008-09 and fiscal deficit at 3.1 per cent brought down to 2.5 per cent, there is some room for implementation of the Sixth Pay Commission recommendations.

While the Finance Minister is on target as far as Fiscal Responsibility and Budget Management Act is concerned, there is a strong likelihood of a larger fiscal deficit than envisaged currently. The Finance Minister’s intention to deal with the growing significance of off-budget borrowings is a step in the right direction.

Growth boosters

Growth boosters, by providing consumption a stimulus, abound in the Budget, as do measures to mitigate the impact of higher prices. The expansion of the National Rural Employement Guarantee with a provision of Rs 16,000 crore is likely to result in the creation of very low-wage jobs across the country.

The increase in Jawaharlal Nehru National Urban Rural Mission allocation to Rs 6,866 crore; the proposed national fund for power transmission and distribution reform; and enhancement of allocation for National Highways Development Project signal commitment to infrastructure development.

Excise duty reductions will also help in combating the slowdown. Raising the tax-exemption limit is a good move for the Government. With limited resources, the marginal benefit from allocating time and effort on the higher income brackets rather than pursuing the small tax-payer would be better.

Total allocations for education, health and other social welfare increased substantially, and while these initiatives are small, big programmes are also supported, creating a good balance between long-term and short-term objectives.

Risky move

Among various populist measures, given the imminent Elections, the debt waiver to farmers stands out. The move is a risky one. Although the Government may re-imburse banks in the short term, it lends for a significant moral hazard for future borrowers and could be difficult for banks and future Governments. Instead, the more challenging but efficient solution of a broad-based safety net in both rural and urban economies would have been better.

(The author is Managing Director and Region Head, Standard & Poor’s South Asia.)

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