BUDGET SPECIAL

New Delhi, 3 March 2008

Please All Budget

NEED TO SHORE UP ECONOMY

By Dr. Vinod Mehta

(Former Director, Research, ICSSR)

The budgetary proposals for the next fiscal, if one may say so, have stumped everybody--- the members of the UPA, the Opposition, the farmers, the salaried and the self employed, women, senior citizens, the corporate sector, people belonging to the minority sections, youth and so on. 

The Opposition parties have called it an election/political budget. One may call it by any name, but the fact is that the Finance Minister Chidambaram could afford to be generous. Against the backdrop of the fact that the economy is growing at a fast rate, the economic fundamentals are strong and both the direct and indirect tax collections are swelling.

It may be recalled that the outgoing Finance Minister of NDA Government, Yashwant Sinha, in his interim budget in February 2004 had also provided some sops to Central Government employees in the form of the merger of 50 per cent of the dearness allowance (DA) with the basic pay as well as some sops to the farmers etc.

It is natural for any Government in power to be soft during election year. Chidambaram, however, is lucky to be so generous for elections are yet to be announced and is therefore not hamstrung by the poll code of conduct. Besides, the financial situation is relatively quite strong which gives him the necessary leeway to take the risk.

Whether the budgetary proposals translate into votes for the Congress and its allies only time will tell. As of today the proposals are likely to have a salutary effect on the economy as a whole.  If the slight slowdown in the growth is checked the revenue collections will continue to swell which will keep the fiscal deficit down.

The most important feature of the budgetary proposals has been the decision of the Government to write off Rs 60,000 crores loans to the marginal and small farmers. Recall, before the budgetary proposals were presented the Opposition wanted the Government to write off the farmers debts to save them from the dire financial crises. Now that the Government has decided to write off the debts they are questioning how the Government will do so without jeopardizing the banking sector.

Well this is a million dollar real question, which cannot be wished away. One has to compensate the banks which will write off the loans. There is no clue in the budgetary proposals on this except crucial aspect. All we have is the Finance Minster’s assertion that he has done his homework which will be revealed over a period of time. 

In any case, non-recoverable loans to the farmers are like any other non-performing assets (NPAs) of the bank and to that extent it would have been a drag on their balance sheets. This would have been written off in any case but now the Government will provide funds over a period of three years to the banks to shore up their balance sheets.  Part of this could come from the increased tax collections and a part could be met perhaps by floating bonds. The picture should be clear in the next three to four months.

Importantly, however, the problem of the agricultural sector cannot be solved by merely writing off loans of the marginal and small farmers. The problem is that farming is no more a viable remunerative activity on marginal and small farms of up to two acres. With the costs of inputs like seeds, fertilizer, going up every year, the restricted availability of timely institutional credit, difficulty in marketing of produce and low productivity has been bringing misery to the marginal and small farmers. 

The solution does not lie in writing off of loans but in shifting the small and marginal farmers from the agricultural to the manufacturing and the service sector. This calls for massive investments in the manufacturing sector especially in labour intensive industries in the semi rural-urban set up.

At the moment the country has the money to initiate this shift, what it needs is a clear cut road map to realize this shift over the next five to six years. We cannot have a situation where over 70 per cent of the population is dependent on agriculture, which contributes only 25 per cent of the GDP. If this state of affairs continues both the farmers and the agricultural sector will continue to suffer and suffer more with every passing year. Hopefully, after the budget has been passed the Government and the Opposition will reflect on this issue.

This apart, the consumers are happy as the enhancing of the threshold limit of income for tax purposes will put more money in their hands. The threshold limit has been increased in anticipation of an expected increase in the pay scales of the Government employees consequent upon the recommendations of the Sixth Pay Commission in the next fiscal year.

If this threshold limit is not raised the Government employees would have been made to part with a large part of the increase which they would have received in the form of arrears for two year and enhanced pay during the next fiscal. The private sector salaried people and self-employed people also stand to benefit from this proposal.

There has been no change in the corporate tax rates so the corporate world is happy. The corporates are also happy as the peak customs duty remains unchanged while the excise duty has been reduced on certain durable consumer goods. As a result imports will not increase to any significant extent while the reduction in excise duty together with the enhanced tax threshold limit will spur the demand for consumer goods which in turn will help lift the growth rate of the manufacturing sector which has witnessed a slight slowdown in the last quarter of this fiscal.

It must be understood that India’s growth is still domestic demand driven and not export driven. Therefore, the recession in the USA and other countries will not have any serious adverse impact on the Indian economy and the Finance Minister is right in providing the demand stimuli to the manufacturing sector.

The budget has also provided an increased allocation for education, healthcare and other welfare activities. Hospitals which come up in the private sector will enjoy a tax holiday for five years. There is also a proposal to set up more colleges, universities, IITs, IIMs and so on.

The most notable feature of the budget has been the creation of a fund for skill development. With the economy expanding and the nature of jobs changing our young people are not well equipped to enter the job market. There are jobs but there are no trained people to handle those jobs. Be it at the level of the blue collar workers or the white collar workers. The skill development programmes will help younger people to acquire skills which are in demand in the industrial or service sector and thus make them employable.

In sum, the budget on the whole is a good one; whether one calls it a populist budget, an election budget or a vote-catching budget. Its worth lies in shoring up the economy and keeping the economic fundamentals strong which should be evident in the next six months. --- INFA

(Copyright India News & Feature Alliance)