Commentary/Mani Shankar Aiyar
The Budget will go for a six, if there is any stumbling on the agriculture front
Sengupta quantifies the disaster-in-making in respect of
infrastructure. He says that whereas power requires a minimum
state investment (additional to what the finance minister has
proposed) of some Rs 15-20 billion, state investment is also
needed on a much larger scale for "surface transport"
(a fancy name for roads and bridges) and construction.
He stresses
that to "push growth"
we need to "increase public investments (to) stimulate effective
demand, which is badly needed in view of recessionary conditions
in industry." This is in accord with Manmohan Singh's prescription
in the Nehru lecture that "public investment in irrigation
and power has to be encouraged." Please note Singh's accent
on "public investment..." That merely by opening power to the private and multinational sectors, the state cannot abnegate its duty to provide infrastructure.
Sengupta, like Union Agriculture Minister Chaturanan Mishra of
the Communist Party of India, deplores Chidambaram's step-motherly treatment towards agriculture. Far from heeding Manmohan's call for
vastly increased public investment in agriculture, Sengupta points
out that, "In agriculture, the increase in the Budget this
year is marginal, and spread in small amounts over a number of
sectors, unable to make much impact."
This is ironic because
the only reason the finance minister was able to save face
over his government's dismal economic performance in 1996-97 was because of the agricultural sector's outstanding performance. (Which was made
possible because of an outstanding monsoon.) If for reasons of
weather or Chidambaram's tight-fistedness when it comes to humble
farmers, we see any stumbling in 1997-98 on the agriculture front,
all the Budget's other figures will go for a six.
Sengupta points out "the most important factor that
can push up growth in the private sector is a reduction in the
real rate of interest." He has hit the nail on the head:
interest rates, not taxes, are what is holding back investment
in private sector industry. And as Sengupta dolefully acknowledges,
"Policies of the Reserve Bank have failed to make much of
a dent on interest rates, despite our commercial banks being flush with liquidity for the past two or three months."
What Sengupta has not added is if real interest rates were
really to descend to reasonable levels, the inflow of NRI hot money
would dry up and we would be in a balance-of-payment soup. It
was only Singh who was able to fine-tune interest rate movements
with such finesse that NRI inflows reached record levels even
as industrial growth rates soared.
Sengupta is highly sceptical of "the theology that a reduction
in corporate tax and income tax would be sufficient to expand
output and investment." Without such expansion, there is
no way lower tax rates will keep government revenues buoyant.
He adds, "the assumption about larger compliance due
to reduction in tax rates is highly questionable," especially
as the success of the voluntary disclosure scheme "depends
very much on non-harassment of tax-evaders."
Chidambaram
impaled on the horns of a dilemma of his own making is not a pretty
sight. And, of course, if his revenue assumptions are wrong --
and I see no way they can be right -- we all of us
are going to be in a pretty pickle before long.
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