The Hindu Business Line : `Exceptional circumstances called for alleviating measures'

The last Budget of the UPA Government and the seventh full-fledged Budget presented by the Union Finance Minister, Mr P. Chidambaram, for the next fiscal undeniably evoked bouquets and brickbats. It seemed an apt Budget for For a government in its last lap, it needs to be politically correct by temporarily pressing the pause button on sound economic rationale.

Having understood the compulsions of electoral politics and the incumbency implications of seeking a fresh tenure in 2009, or earlier if the there is a general election is advanced, the UPA government's 2008-09 Budget laid out its intentions through the instrument of the budget a bit loud and clear. It may This might please a few, displease many and leave a whole lot of economic players disappointed.

However, the most articulate spokesman of the Government and an economist in his own right, Mr Montek Singh Ahluwalia, the Planning Commission's Deputy Chairman, has his own unassailable defence of the budgetary proposals.

Always candid and cogent in his views and with his characteristic penchant for making complex ideas understandably lucid, Mr Ahluwala told Business Line here, the day after the February 29, 2008, that the "Budget has a large number of initiatives that spell out what was promised in the Eleventh Five-Year Plan with great emphasis on many of the aam admi schemes, such as the like NREGS, PM's Gram Sadak Yojana, Sarva Shiksha Abhiyan, Mid-day Meal Scheme, National Horticulture Mission, Irrigation and Water Resources Finance Corporation and new Rashtriya Kisan Vikas Yojana".

He said these are not just welfare schemes aimed at weaker sections of the community but are meant to augment their productivity - some in the short term and some in the long term. They basically ensure the inclusiveness of growth and also directly support growth. Mr Ahluwalia also refutes the charge that the Budget does not roll out reform measures, contending that the Industry Ministry removed a number of items from the reservation list of small-scale industries a month ago.

"Ten years ago, we used to announce these in the Budget. Now these are all a continuation of the normal process. The Budget should focus on those reforms that are relevant to the Finance Ministry. For example, the reduction of the Central Cenvat rate from 16 per cent to 14 per cent is a very important step reflecting continuation of reforms".

Excerpts from the interview:

On waiver of debt to farmers: This is clearly an exceptional measure. For many years, investment in the agricultural and related sectors was neglected and experts agree that this had an adverse effect on agriculture.

A very large proportion of the community was put in a somewhat weak position - farm investment was not productive, farm profit was low, 49 per cent of farmers wanted to leave farming and there was some evidence of rural distress.

These exceptional circumstances called for some alleviating measures. Treated as a one-time step, and limited as it is to certain categories and only to overdue loans, it is more defensible than the critics make it out to be. What it does is clean up the books.

The more important thing for agriculture is that we are taking a large number of steps that will hopefully would improve the productivity of farming, making it possible for farmers to actually land productivity that is possible. The various agricultural initiatives such as National Horticulture Mission, crop diversification, modernising marketing systems, building a logistics chain to link farmers to markets, combined with a whole lot of technology support and strengthening of seed production, would put agriculture on the right track.

But these steps taken together have to be supported by growth of credit. If you find that credit has choked because farmers are unable to repay, some form of one-time clean up of the books becomes necessary. It is really like bankruptcy laws applied to the agricultural sector.

Budget and Infrastructure: There is no doubt that major investments are needed in infrastructure as a precondition for rapid growth. Does the Budget address this issue? I think it does, to the extent it can. In the Eleventh Plan we have outlined a very clear strategy to take the investment rate in infrastructure from 5 per cent of GDP in 2006-07 to 9 per cent of GDP by the end of the 11th Plan period.

I must emphasise, however, that not all of this is going to come from the Budget. The Budget has done its bit in this area. It provides resources for rural connectivity, rural electrification, irrigtation and road development in the remote parts of the country. These are areas where we cannot expect public-private partnership (PPP).

The Finance Minister has also made a very important announcement that we intend to establish a special financing mechanism for investment in irrigation. This means that the money is not going to come via the Budget.

We will set up a new institution that will provide funds for expansion of irrigation outside the Budget. Obviously, they will be loan funds and not grant funds but they can be on a long-term, and on a somewhat more concessional, interest rate.

The strategy of the Eleventh Plan for infrastructure is that Budget resources should go to those infrastructure projects in which the private sector is unlikely to participate and this is what is happening. Apart from the PMGSY, we are putting doing a lot of investment in road development in the more remote areas - the North East has been given a big promised road expansion programme.

Similarly, in the power sectorelectricity, the focus is on extending rural electrification through the Rajiv Gandhi Grameen Vidyutikaran Yojana which is going to require budgetary money.

A substantial part of the investment in infrastructure in these sectors is going to come from public sector enterprises such as NTPC, Powergrid, and Airports Authority of India. They will rely on their internal resources and what they can borrow from the market. These are note paid from the Budget.

There is a concerted thrust, both in the Centre and in the States, towards reliance on PPP. This is true of roads, airports, power and ports. It is true of railways as well. The Railways have announced PPP in the development of world-class stations. These initiatives do not figure in the Budget but they are a part of the government policy.

The Finance Ministry and the Planning Commission have been working over the past year to push for the successful implementation of PPP and our success in this area will be critical.

On Revenue Deficit (RD) deferment: The logic of a zero RD is that you should not be spending on consumption more than you are getting from revenue. If the RD is zero, the entire fiscal deficits can be used for purposes of capital expenditure. Our problem is that the Centre still provides a lot of grants to the States that which are meant to finance capital expenditure in the States.

This means that what is shown in the Central government books as revenue expenditure is not really revenue expenditure as conventionally understood. It is actually a transfer for financing development (capital expenditure) in the States.

Therefore, to insist on a RD target of zero for the Central government is unrealistic. If you are going to have a zero RD for the Central government, you should at least take out from calculations those grants which go to the States for developmental purposes.

If we are making grants are made to the States to pay salaries that is different, but most of our Centrally-sponsored schemes involves very a substantial amount of capital investments, all of which figures as grants in the Central government.

Budget and Inflation: The impact of the Budget on inflation is going to depend essentially on what it does it do at the end to the fiscal deficit and to the rate of monetary expansion.

Fiscal deficit is 2.5 per cent for 2008-09, which is very low. It will go up depending on the if there is Pay Commission or if there are some other expenditure. However, we don't know what will be the final outcome because the revenue numbers in the Budget are quite conservative.

The Planning Commission's view is that if the growth remains strong - which we expect - then they will get much more revenues will be much higher than they are budgeteding for. That is what happened in 2007-08. So, taking all these things into account and given that inflation is, at the moment, under control, we need not worry too much.

But, of course, we have to be vigilant and I am sure the Finance Minister will not hesitate to take corrective steps if inflation rises. If we have a good monsoon, though, I expect that inflation will remain under control.

More Stories on : Budget | Interview | Farm credit

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page