Comment

Budget Lacks Growth Impetus

Manmohan Singh

The budget contains many statements about promoting the growth of agriculture, small industries and infrastructure. There is no doubt that these are desirable sentiments. But I honestly do not believe that they can impart any serious growth momentum to an economy that has slowed down so substantially. My feeling is that the budget will not revive either consumption or investment demand. Things like the depreciation allowance will only have a marginal effect. Also, they do not produce any results in the short run. You have to create a climate for enterprise. The budget has many small things for different sectors, but I don’t think it succeeds in creating what Mr. Yashwant Sinha used to call ‘the feel good factor’. To be sure, he seems to have learnt from last year’s experience. There are no rash promises. But in the process, one loses the big picture.

The FM does not even mention what is the growth rate he is targeting for the year, and this I find very disturbing. The Indian economy has been slowing down since 1996-97. The average growth during the 9th Plan will not exceed 5.5% and yet in the 10th Plan the government is targeting 8% growth. But what are the strategies to get from 5.5% to that 8%? On that the budget is completely silent.

To be sure, the Finance Minister talked a great deal about simplification and rationalization of taxes. But my feeling is that, in the process, he has introduced a greater element of discretion. One significant thing that he has done is that he has lowered the peak customs tariff from 35 to 30%. Yet, if one looks at the average tariff, it is higher this year than what it was 5 years ago! I do not oppose it, but the fact is that the exchange rate has also been depreciated - I believe that was partly in anticipation of the FM lowering the peak rate. I only hope that he will now live up to his promise to lower the peak duty to 20% in the next two years.

I also welcome his removal of the dividend distribution tax. When Mr. Chidambaram had introduced it, I had commented that it was a regressive and inequitable move.

The 5% surcharge on income tax is presumably being imposed in the name of national security. Yet when I look at the defence budget, the figures do not justify this extra burden. Not unless the minister intends to come with some supplementary demand later in the year. On the issue of abolition of administered interest rates, and linking it with market rates much more is being made of it than warranted. The fact is that today interest rates are no more market determined than exchange rates.

I think the attitude to small savings that even some of the financial papers have adopted would never have arisen if we had a credible system of social security. But today we do not have any such system; our people work a great deal to save for a rainy day and then to take away these sops without putting in place a compensatory mechanism is unfair.

The fiscal situation worries me greatly. For the past 3 to 4 years in a row, all targets - for fiscal deficit, tax collection or disinvestments - have not been fulfilled by a large margin. I think that creates doubts about the functioning of our machinery for collecting tax. Considering the size of the economy, the additional tax mop up is not all that significant. In fact, our tax/GDP ratio at the Centre is less than what it was in 1991. Even if we get back to where we were in 1991, it would be a significant improvement. And that should be done without tinkering with tax rates.

The other thing that worries me about the budget-making process, is the wide divergence between the budget estimates and the revised estimates and between the revised estimates and the actuals. This is true not only of fiscal deficit, but also of disinvestments targets, of tax revenue and so on. For the first time, you have a yawning gap in your tax collections of over Rs. 20,000 crore; and it is dismissed as a consequence of the slowing down of the economy. Where is the sanctity of the budget-making process then?

I don’t think the FM will succeed with his carrot-and-stick policy with the states. Most states are in serious trouble. They are diverting funds left and right just to pay salaries. Their problems should be faced head on and, if necessary, by a once-and-for-all debt rescheduling programme. I don’t think the kind of conditionalities he is talking about for releasing funds for states will work. It is difficult to police, and if you start policing you will reduce states to principalities, which is against the federal principle of our Constitution.

This is a budget which has many good things – like all budgets – but quite frankly it does not outline any strategy to meet the challenges that face the economy today. Ideally Mr. Sinha should have begun with a diagnosis of the problem: Is the economy suffering from a demand shortfall? If so, it would have called for one course of action. But if the problem is one of supply bottlenecks and infrastructural constraints, that would have called for another course of action. Unfortunately, Mr. Sinha has not given any inkling of his thinking on what is the malaise afflicting the economy.