Economic Highlights

New Delhi, 2 March 2007

Budget Tackles Larger Issues

Focus Shifts to Farm & Social Sectors

By Dr. Vinod Mehta

The Finance Minister through the medium of annual budget has tried to shift the focus for good reasons to the long neglected agricultural and social sectors like education and health; allocations for these sectors have been increased that will have salutary effect on the economy as a whole in the coming years.  The message which he has tried to convey is that the high growth rate can be sustained only if we take along with us the agricultural sector, as 65% of the population is still dependent on it for livelihood and by improving the skills of the population and providing them a measure of good health.

This shift was not anticipated by financial writers and advisers who filled pages after pages of financial dailies with speculative stories about Finance Minister doing away with tax exemptions, raising the tax slabs, redefining the age of senior citizens for taxation purposes and so on.  The tax regime has more or less stabilized and the time had come to move from “tax exemptions” to more serious concerns which affect the average citizen like health, education and steady supply of items of daily consumption like foodgrain, edible oil, pulses etc.  This is what the Finance Minister has done and it will be difficult for the subsequent budgets to ignore these concerns.

There has been only marginal increase in direct taxes; education cess has been raised from 2% to 3%, direct distribution tax (DDT) on dividends by 2.5% from 12.5% to 15%, and tax on dividends from investments in money market mutual funds to 25%.  This was not necessary; may be it has been done to please some of the UPA partners.  However, the stock market did not appreciate this.  The Finance Minister can ignore this for the reason that investors in the stock market are like moneylenders who are solely interested in counting the pennies they earn and not in the larger issues that concern the economy and the people.   The current high growth rate will ensure that the stock market will bounce back eventually.

The reason for focusing on the agricultural sector is that this is the only sector and very important one which is lagging behind.  The higher growth rate of the manufacturing and the services sector cannot be sustained without raising the growth rate of the agricultural sector.  By making large allocations for the agricultural sector the Finance Minister has tried to achieve two things over a period of time.  One, it will help put more money in the hands of the farmers which in turn will boost the demand for industrial products and services and, two, it will help increase the production and productivity of essential commodities and thus enable the country to control inflation.

The production and productivity of various essential commodities are known to have been falling for the past few years and the inflationary pressures building as a consequence of that.  And the current inflationary situation is partly due to our neglect.  Agricultural land cannot be increased; on the contrary there is a pressure on the agricultural land to be diverted to industrial use and in such a scenario we have no option but to increase production and productivity of agricultural products and this is possible when we provide high quality seeds to the farmers, timely credit, better irrigation facilities, better extension services to the farmers, better prices for their produce and so on.

This is how the Finance Minister has tried to tackle the situation by increasing the availability of credit to farmers, by allocating funds for drip irrigation and for recharging ground water, by reestablishing extension services, by providing funds for the development of high quality seeds, direct fertilizer subsidy to farmers, insurance cover for landless labourers, guaranteed employment in rural areas and so on.

The result of these measures, provided they continue in the subsequent budgets, will be visible after two to three years.  For instance, India is the largest consumer of pulses and the production of pulses is much less compared to demand.  The other two countries that produce pulses are Myanmar and Turkey.  If we were to import all their production even then we shall not be able to fully meet the domestic demand for pulses.  Either we cut down our consumption of pulses or we increase the production, which is possible only in the medium term when we can bring more land under cultivation of pulses and provide the farmers with high quality seeds.  This is the only way to check the rising prices of pulses on a long term basis.  This holds true for other agricultural commodities like food grain, oilseeds, fruit and vegetables.

Again if the income of the farmers increases they will naturally spend a relatively larger part of it on goods produced in the manufacturing sector be it tooth paste or soap, bicycle or scooter and so on.  The total demand for industrial products, which is still limited to urban population will further get enlarged leading to better utilization of the production capacities and bringing in more profits.  The companies understand this better than investors in the stock market. 

Therefore, it is not surprising that almost all the companies and industrial houses have welcomed the budget; some of them might have expected some reduction in corporate taxes but now they see more sales and more profits in the coming years in the current budgetary proposals.  There are 115 million farm families whose demand for industrial products will make all the difference.

The proposed higher allocation for education and health care is also going to have salutary effect on the quality of life of a large number of people, especially the ones who are almost at the bottom of social ladder. The allocation for education is still nowhere near 6% of the GDP but the important thing is that that Finance Minister has taken note of the need for educated workforce.  Extension of mid day meal schemes to post primary school students and scholarships to students of higher classes will go a long way in checking school dropouts. Similarly, provision of health care facilities especially for children, reduction in the prices of drugs by way of reduction in indirect taxes, relief in taxes on contribution to medical insurance is one important step in improving the health of the people. 

In most countries expenditure on education and health is development expenditure; it is not a strain on the country’s finances but necessary expenditure to maintain a relatively stable and higher growth rate.  This is what the Finance Minister has attempted to do.

It may not be the “dream budget” in the sense of reduction of taxes but it is a budget which redefines the priorities of the country in the context of a higher growth rate which is going on for the last three years.  It is an attempt to bring in the sections of society which have not yet benefited from the higher growth rate.  The stock market advisers are fond of talking of “market correction” (fall in share market) when the stock market goes up unusually very high; in the same parlance one can say that the current Budgetary proposals are nothing but long needed “budget correction”.---INFA

(Copyright, India News and Feature Alliance)