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Simple Budget, strong signals
March, 06th 2007
From a longer-term perspective, the higher allocations for education and health are a welcome reflection of the concerns about inclusive growth, combining distributive justice with a reminder of how growth is important in achieving such equity.

All of us who grew up apprehensive about every Budget raising one tax or the other or levying surcharges, and challenging every honest tax-payer to learn the art of tax `planning', are witnessing a sea change now. Gone are the days when one waited to hear the pre-Budget and post-Budget opinions of various experts. Indeed, nothing earthshaking has been said by those commenting on the various TV channels, either before the Budget and after.

In fact, for a change, recent Budgets have gone a long way in reducing the import duties, simplifying and rationalising direct tax structures and reducing the complexities of filing tax returns. The latest Budget, in particular, is an indication of how Budgets will look from now on, regardless of who is the Finance Minister. A strong economy will keep yielding resources. For reasons of prudence, no new taxation or tinkering with rates will be attempted.

Sectors, regions and communities that have generally been neglected will continue to get special dispensations. It is pure political economy, in line with Harold Laswell's definition of politics as "who gets what, when, and why".

The main message of the present Budget may be taken as the following: the country now is on a high growth path; and this must naturally lead to concerns about inclusive growth, which combines the objective of distributive justice with a reminder of how growth is important in achieving such equity.

Farm Constituency

Budget 2007-08 has been carefully crafted to include the various dimensions of inclusive growth. The Finance Minister did spend, for instance, a substantial amount of time on agriculture.

With 115 million farming families, accounting for almost half the country's total population, it is vital that their income grows at a reasonable rate and their welfare is safeguarded well enough to put a stop to their distress and indebtedness.

The following initiatives in the Budget could help raise the rate of growth of income from agriculture: hike in the expenditure on Bharat Nirman by 32 per cent; farm credit expansion in 2007-08 to Rs 2,25, 000 crore and an addition of 50 lakh new farmers to the banking system; a special three-year plan for 31 distressed districts; a mission for pulses; special funds for coffee, rubber, spices, cashew and coconut; higher allocation for the Accelerated Irrigation Benefit Programme; farmer training; revival of the extension system; continuation of fertiliser subsidy with emphasis on its delivery directly to the farmer; agricultural insurance; and expanded allocation for the Rural Infrastructure Development Fund.

Mr Chidambaram also alluded to financial inclusion. To promote access to credit for vulnerable groups, two initiatives have been announced: establishing a Financial Inclusion Fund with Nabard, and setting up a Financial Inclusion Technology Fund to meet the costs of technology adoption, each fund with an overall corpus of Rs 500 crore. Paramount in importance is raising the growth rate of the agricultural sector from the Tenth Plan average of 2.3 per cent per annum to 4 per cent per annum during the Eleventh Plan period.

How all the programmes enumerated under agriculture will add up to provide the 4 per cent growth annually over the next five years, has not really been made clear. The Budget could have hinted at how such links would be studied and reviewed carefully and how, if necessary, mid-course corrections will be carried out to ensure that we indeed move closer to the target.

Over and above the initiatives in agriculture, others that directly and/or indirectly promote inclusive growth are the proposed means-cum-merit scholarships, initiatives to upgrade vocational and technical education, the scheme to promote employment of physically challenged, the National Rural Employment Guarantee Scheme (NREGS), the Sampoorna Gramin Rozgar Yojana (SGRY) for rural employment in the districts not covered by NREGS, the Swarna Jayanti Shahari Rojgar Yojana to promote urban employment, targeted PDS, various schemes for the welfare of Scheduled Castes (SCs), Scheduled Tribes (STs) and minorities, the `Aam Admi Bima Yojana' for rural landless households, and increased allocation for the Backward Regions Grant Fund.

Far from six per cent

From a longer-term perspective, investments in education and health are to be taken as fostering inclusive growth directly and indirectly. The allocation for education has gone up by 34.2 per cent, representing 0.7 per cent of projected GDP, marginally higher than the 0.6 per cent of GDP in 2006-07.

The allocation of Rs 32,352 crore for education is welcome, as are the higher allocations for the Sarva Shiksha Abhiyan, mid-day meals, and so on. Yet, the fact that there is not even a mention of the long-sought allotting of 6 per cent of GDP for education is a glaring exclusion. The target of 6 per cent of GDP would imply an allocation of Rs 2,78,023 crore for education. Excluding the budgeted amount for spending by the Centre, the States must spend almost Rs 2.5 lakh crore on education in the coming fiscal. Is that what is aimed at?

Data on page 207 of the Economic Survey show that during fiscal years 2001 through 2007, the total spend on education as a per cent of GDP was invariant, at around 2.8 to 2.9 per cent. Will it be better the coming fiscal? If not, it will be tantamount to continued exclusion of a large segment from State-funded quality educational opportunities. Parenthetically, it must be pointed out that from at least the next Economic Survey, it would be good to have the second chapter deal with `human resource development' in place of the current practice of the last, Chapter 10, dealing with `social sectors'.

Sustaining Growth

Here is one across-the-board measure to raise all tax rates. Over and above the cess of 2 per cent on all taxes `to fund basic education', the Finance Minister proposed the additional cess of 1 per cent `to fund secondary education and higher education and the expansion of capacity by 54 per cent for reservation for socially and educationally backward classes.'

While none can argue with the most laudable inclusions, the investor perception could be that the overall tax burden has gone up not only because of the extra 1 per cent cess, but also the hike in the dividend tax, bringing ESOPS under the FBT net, extension of MAT to IT sector, etc. Going by the comments of the Ficci Chief, the measures "would further add to the tax burden of corporates and send wrong signals at a time when India Inc. was expecting rationalisation in corporate tax rates... "

One must take the Ficci comments seriously in the context of the national effort towards a sustained 9-10 per cent growth rate, with manufacturing in the driving seat and with supporting contribution from agriculture and services. It would be terrible if we were to face a relatively low growth rate in the very first year of the Eleventh Plan.

Bhanoji Rao
(The author, formerly with the National University of Singapore and the World Bank, is Professor Emeritus, GITAM Institute of Foreign Trade, Visakhapatnam and Visiting Faculty, Sri Sathya Sai University, Prashanti Nilayam)

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