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Business Commentary/Dilip Thakore

Budget brings bread and butter issues into sharp focus

In my last column, I have assessed the Union Budget of 1999-2000 and evaluated the stewardship performance of the Bharatiya Janata Party-led coalition government in fiscal 1998-99 and the steps it has taken to address the fundamental problems of the Indian as it sees them.

But one of the readers has remarked: "You have looked at the past year and at the long term future but you have not assessed the impact this Budget will have in the immediate future, that is in fiscal 1999-2000."

This is legitimate criticism. Therefore a second look at the Union Budget is warranted.

The quality of the Union (and state governments') budgets needs to be evaluated in terms of the impact they are likely to make on the bread and butter issues like prices, employment, industry, agriculture, service and infrastructure growth rates, which shape the lives of citizens within a given economy.

The behaviour of the price indices is not likely to be radically different from what it was in fiscal 1998-99. The fiscal deficit has been budgeted at a respectable four per cent in the coming year but this has been done by a sleight of hand by transferring small savings to the account of the states.

But the overall fiscal deficit (Centre plus states) is likely remain a very high eight per cent. This will maintain the pressure on prices.

In this context, it is important to understand that Indian inflation is fuelled by supply side inefficiencies. In particular, food prices are subject to wild swings: these hit the consumer and the producer very hard because of marketing infrastructure deficiencies such as lack of post-harvest storage and processing facilities, transport bottlenecks, etc.

In the short run, these supply-side inefficiencies are unlikely to be righted by this government or its Budget. The only silver lining on the price front is the government's proposal to set up an Expenditure Commission. The panel will suggest ways and means to cut government expenditure and reduce its revenue and fiscal deficits.

Supplies into the economy would also improve if industrial growth, which halved to a near rock-bottom low of 3.5 per cent in 1998-99 (from 12.8 per cent in 1995-96), would revive. The major contributions of the Budget to this end are that it has made investments in hitherto languishing mutual funds income tax free and resuscitated the stockmarket.

The Budget has also expanded the number of industries into which foreign investment can flow with a majority stake. It is the first Union Budget to give a big boost to the housing construction industry which has a great multiplier effect in terms of employment and incomes creation in upstream industries such as cement and steel.

The Budget has has given the green signal to the accelerated restructuring of industry by encouraging corporate takeovers and mergers by exempting capital gains and permitting the carry forward of unabsorbed depreciation and losses to acquired units.

These are significant and path-breaking policy innovations if implemented efficiently. Politicians have in the past tended to belittle the vital role of the stock markets in the industrial growth and development process. But the reality is that an active stock market that continuously attracts household sector savings, is a prerequisite for industrial growth.

And by attracting small savings into the stock market via tax-exempt mutual funds which offer retail investors a measure of protection, the finance minister has exhibited considerable ingenuity, as testified by the continuously rising share price indices.

Facilitating foreign investment is the other side of the same coin. Because of past neglect of infrastructure development, the investment needs of the Indian economy are gargantuan, much greater than the national savings rate of 25 per cent of GDP can sustain. The continuation of liberalisation and implicit rejection of the mantras of the swadeshi lobby is another feature of the Budget which bodes well for industrial growth in the immediate future.

If only this liberalisation could be combined with the budgetary boost given to the housing industry and if urban development minister Ram Jethmalani's proposal to permit 100 foreign investment in housing projects is accepted by the Cabinet, this Budget may well go down in history as one of the most industry-friendly.

For the agriculture sector, too, the Budget makes encouraging noises. The National Programme for Rural Industrialisation which proposes to set up "rural clusters" every year, is an imaginative and long overdue proposal, but it will take several years before it begins to impact the economy.

Ditto for the long overdue "credit-linked" capital subsidy scheme for construction of cold storages and godowns. The modest scheme (two million tonnes over the next few years) is sought to be implemented by the ministry of agriculture and National Bank for Agricultural and Rural Development.

Unfortunately, there is little awareness in the Budget, which is otherwise agriculture-friendly, that the major problem of Indian agriculture is not production; it is marketing and distribution. Apart from the Re 1 per litre cess on diesel which will raise almost Rs 50 billion, which is proposed to be invested in developing rural roads and national highways, there is little in the Budget proposals to facilitate the smooth flow of agriculture produce from farms to domestic and foreign markets.

Consequently, since agriculture sector value-addition was a high 5.3 per cent this year (1998-99), a fall in agriculture output in the coming year is likely.

The imposition of the Re 1 cess on diesel which will be utilised towards road construction apart, the Budget proposals have made other efforts to encourage infrastructure development. Project imports (power generation, coal mining, refinery, telecom and fertiliser industries) have been subjected to the minimum five per cent basic customs duty while exempting mega power project imports completely.

But here again, the problems are mainly procedural and surprisingly the Budget has little to say about removing the hurdles that have stymied almost all the mega power projects except the Dabhol power project in Maharashtra.

And it is hardly a secret that the flow of domestic and foreign investment into electricity generation, roads and ports construction is way below the needs of the Indian economy.

In a nutshell, efficient implementation of policies that make good sense is the critical factor that will determine the fate of the economy in fiscal 1999-2000. Unfortunately, this unstable government is hostage to several fringe groups playing recklessly populist politics. Consequently, almost every sensible proposal for reshaping or restructuring the under-performing Indian economy has to be rolled back.

Moreover, a former bureaucrat himself, Sinha absurdly continues to believe in the highly questionable ability of the nation's 20-million-strong bureaucracy to deliver. That is why, on the vitally important issue of privatisation, there is no departure from "creeping privatisation" of the public sector which is the biggest drag on the Indian economy.

Dilip Thakore

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