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'Budget is good despite slowdown'

Dr U Sankar

The Budget is quite good, despite the slowdown in economy and the Gujarat earthquake.

The finance minister has made every effort to continue the economic reform process. He has not tampered with long-term fiscal policy. At the same time, he has tried to address problems facing the economy, in the agriculture, infrastructure and public sectors.

The basic idea is downsizing the government and there are many estimates of surplus staff in government departments and public enterprises. Surplus staff is partly due to our philosophy of employment generation regardless of cost.

In a market driven economy, efficiency will also be applied to the public sector. The Pay Commission also recommended downsizing.

For large public concerns, restructuring is needed to cope with global competition and improved efficiency. Details are yet to be worked out.

There is nothing directly to help the poor. The long-term solution to eliminate poverty is via growth and public sector programmes targeted at the poor. There are a few programmes in the Budget targeted at scheduled castes, scheduled tribes and poor women.

This Budget gives a special thrust to the development of technical education, particularly IITs. It has also an educational loan programme to help the deserving poor to pursuit higher education in India or abroad.

The prime minister wants a nine per cent growth during the 10th Plan period. In the past, Germany, Japan and recently India achieved such growth rates consistently for decades. In India, it is possible to achieve such growth if the government changes it role from a regulator to a facilitator and take steps to improve the quality of infrastructure.

Public policies should be based on incentives and penalties to extract the best out of all.

Nine per cent growth cannot be achieved immediately, but if you want a large share in the old economy and improve our image, we have to strive hard at least for a few years. This year, the growth rate may be around six per cent due to a slackening in the agricultural sector and declining growth in the capital goods sector.

Incentives given will take time for translation in terms of physical investments or income generation.

As far as customs duty is concerned, the goal is to have few rates, simple and rational tariffs and to achieve the level prevailing in East Asian countries in five years. There have been reductions in rates for capital goods, particularly for the Information Technology sector.

On infrastructure, the minister has identified critical problem areas, like the power sector. He highlighted huge deficits of state electricity boards and the impact on their performances and non-payment of dues to central power sector agencies. He stressed the need for metering of power, reduction in transmission and distribution losses, fixation of tariffs by an independent state electricity authority and charging of minimum prices for agriculture.

He suggested corporatisation of ports. He stressed the need for investments in the road sector. As for the telecom sector, competition is being allowed in many market segments.

He has promised to introduce the Convergence Bill, keeping in view rapid technical changes in the information sector.

There are also many tax incentives for investments in the infrastructure industry, including tax holidays, accelerated depreciation allowance and exemption in capital gains tax.

An incentive for the financial sector is that investment of capital gains in the purchase of primary equipped shares will be exempted from capital gains tax.

The minister says the share of NPA has come down from 14 per cent to about 7.5 per cent. He has also mentioned the creation of more recovery panels. He spoke about the abolition of the BSRB and promised more autonomy for banks.

This will give freedom to banks to recruit people they want, taking into account their needs.

The retention price scheme for fertilisers is an outmoded pricing policy. According to it, for the same commodity, namely urea, various firms get different prices. This is against market principles. The Hanumant Rao committee recommended its abolition three years back.

To achieve growth, the minister announced that there would be an exit policy for labour and a policy on contract labour.

Private investors need an exit policy, particularly when business fortunes are below expectation. Another legal reform he mentioned is the review of the Essential Commodities Act of 1956. As per the Act, the government can declare any commodity essential and then have the right to inspect it and give directions to producers. This Act is irrelevant in a liberalised and global economy.

The third is the fiscal responsibility act. The minister has taken the initiative to reduce the revenue deficit to zero per cent of GDP in five years and reducing the fiscal deficit from 5.1 per cent to two per cent in five years.

Reduction of fiscal deficit is important to stimulate private investment, to reduce pressure on interest rates and control the dead burden.

Elimination of revenue deficit will pave the way for growth in capital.

The United States slowdown will have an impact on export earnings. But it may have a favourable effect in terms of prices of US exports to India.

Public investment in healthcare and primary education is very important for growth and for equity and poverty alleviation. These are mainly state subjects. Reduction and revenue deficit will enable governments to spend more on investments related to human capital. Healthcare and health insurance are very thorny problems to tackle, as the US experience shows. However, minimum healthcare should be ensured for all.

In India, industrial policies, particularly the licensing policy, resulted in the creation of industrial units that are below optimum size. Merger amalgamation are some means by which firms can derive economies of scale in production.

The only thing is that the process of merger or amalgamation must be transparent and known to all parties affected.

Private health insurance companies generally cater to the needs of the affluent sections of society. In India, the major problem is providing minimum health facilities to the poor, particularly those below the poverty line. For this group, no private insurance company will be willing to provide insurance. Therefore, public involvement either directly or through a subsidy scheme is required.

The initial reaction to the Budget is good. The minister has abolished all surcharges, except the surcharge for the Gujarat earthquake. He has also announced steps to improve the functioning of the debt market. The primary equity market may get a boost because investments from capital gains are exempted from capital gain tax. Therefore, there is a good chance that market sentiments will improve.

The minister has announced a traditional knowledge library, which will give an inventory of traditional knowledge, particularly in Indian medicines. It is important to document our knowledge in medicine, in agricultural crops and other areas, to prepare for the intellectual property rights regime.

The minister briefly mentioned the reservation policy for small-scale industries. But details are awaited.

He announced that the ministry of power would introduce the Electricity Bill 2000 in Parliament. Electricity tariffs must be completely realigned, keeping in view the cost of supply and subsidies must be restricted to targeted groups and should be phased out.

Such a policy will attract domestic and foreign investment. The major concern of all investors is bankruptcy of EBs. There are many problems in the power sector: lack of metering, high theft and high transmission distribution losses, lack of cost consciousness in creating capacities and poor utilisation of thermal power plants.

But under-pricing of power results in inefficient use of electricity, discourages energy conservation and demand side management.

There was some concern that the general reaction in import duties would result in large-scale imports of second-hand foreign cars. To some extent, the concern is legitimate, as the price of used cars in some developed countries like the US is very low. They are of better quality and some Indians are crazy about foreign brands. There is some justification in raising the import duty on imported cars.

Worldwide, the treasury sector is fastest growing, particularly the information sector. It consists of telecommunication, television and computers. These are knowledge-based sectors and therefore their growth would be favourable to other sectors.

The Budget will have no effect on the brain drain.

This Budget is better than last year's, at least in terms of market expectations.

In the long-term point of view, the minister is pursuing the right policy as he is widening the income-tax net and reducing indirect tax rates. This should continue.

In the last Budget, heavy indirect taxes resulted in high prices and tax evasion. Almost doubling income-tax assessees by bringing them in the service sector is welcome. If the trend continues, it will be possible to reduce indirect tax rates, which will curtail inflationary trends and help the poor.

The minister promised that fiscal deficit will come down from 5.1 per cent in 2000-2001 to 4.7 per cent in 2001-2002. This is a right step in achieving the goal of two per cent within five years.

Export of skilled manpower is not necessarily a bad sign when we have surplus manpower and when these people make remittances to India, the country gets valuable foreign exchange. Some who go abroad may eventually return or even during their stay abroad, can help India's development.

Any short-sighted policy, such as restrictions on migration of skilled labour or a tax on earnings abroad, will have negative effects.

It is a fairly good Budget. And it is not harsh.

The minister has initiated some second-generation reforms that are growth-oriented. He has set up a policy agenda. Political will and consensus are needed to sustain reforms.

Dr U Sankar is director, Madras School of Economics

Budget 2001

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