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Well-intentioned Budget, but lacking dynamism
March, 14th 2007
The Government, with all its initiatives on several fronts, is yet to master efficient resource utilisation and effective delivery of services with demonstrable outcomes.

The Finance Minister, Mr P. Chidambaram's 2007-08 Budget at best gives a modest start to the Eleventh Plan (2007-12) with its core objective of "inclusive growth", a three-year-old commitment of the UPA Government under its National Common Minimum Programme. He must have thought it was time to pay more attention to social goals and also try to secure outcomes, if the ruling United Progressive Alliance has to retain some credibility with the electorate in the testing times ahead.

Robust, growth-driven revenues certainly enabled the Finance Minister scale up allocation for education, health, Bharat Nirman and other flagship programmes, but whether all the percentage increases he assiduously cited will make a great difference in achieving desired targets remains as uncertain as ever. In many cases, the increases are incremental and for some, even lower in real terms.

Be that as it may, the Government, with all its initiatives on several fronts, is yet to gain control over efficient resource utilisation and effective delivery of services with demonstrable outcomes.

Mr Chidambaram could not have been expected to produce another growth-and-reform Budget in a year of several State elections, and by the time he presented the Budget, two States had gone out of the fold of the Congress. There is, however, a bigger battle ahead in UP, which goes to the polls next month.

Sonia's Signal

The Congress President, Ms Sonia Gandhi, attributes her party's reverses to the price rise which the Centre is clearly perceived to have failed to contain and performance not rising to people's expectations in the party-ruled States.

Her call for self-introspection sends the clear message that the UPA must get closer to the people, understand their impatience and move to meet their aspirations for a better life.

Strictly from a social justice perspective, the Budget may have set the right tone, but overall, it has failed to make an imprint on any section. Even for "inclusive growth," it does not go far enough, in a relatively comfortable revenue position, because of self-imposed constraints. For the Finance Minister, the over-riding objective is fiscal consolidation and the Budget itself is set in a three-year fiscal strategy framework (2007-10), which relies on GDP growth at 13 per cent (current prices) and a 17 per cent rise in revenues, on average, with revenue deficit wiped out and fiscal deficit at not more than 3 per cent in 2008-09.

This means there is little elbow room for the Finance Minister to stimulate growth or accelerate "inclusive growth" when he presents his fifth and final Budget in the Government's current term.

Remedy for Inflation

A great disappointment is Mr Chidambaram's inability to come up with some telling measures to tame inflation, when it was already close to 7 per cent at the time of the Budget, such as steps to augment domestic supplies, through some excise cuts and imports, beyond the oft-repeated mantra of doing everything to bring down prices. He takes the view that monetary measures taken by the Reserve Bank of India would impact with a time lag, while he has acted in his Budget on the supply side.

But the way he has described inflation as a "social issue" and one calling for long-term improvements in supply of commodities though increased production of farm goods does not hold out promise of any early relief.

The Prime Minister, who unfolded the vision of the changing face of rural India nearly three years ago, has said strong agricultural revival would be the Government's concern in the Eleventh Plan.

One cannot fault the Finance Minister for not giving in to the demands for lowering direct taxes when his tax reform in the 2005-06 Budget had brought in moderate and stable rates, and when he has to provide massive support to the Plan with its accent on "inclusive growth". Nor, in the prevailing political atmosphere, could he have come up with any bold reform agenda, when the ruling regime is yet to get the Left's nod for pending financial sector legislation (banking, insurance and pension).

But the Budget has belied expectations of withdrawal of a large chunk of tax exemptions, which, according to Finance Ministry, account for 50 per cent of gross tax revenue.

Perhaps Mr Chidambaram decided to move cautiously in tapping this revenue potential as he would not like to stir up a hornet's nest. Also, he has clarified that the limits of tax holiday benefits in Special Economic Zones would be applicable only on export profits of new units and not for those relocating into SEZs.

Infrastructure Financing

Another major area of disappointment is infrastructure, for which the Budget responses are weak. Agriculture, infrastructure and inclusive growth are the core priorities of the Eleventh Plan.

Public-private partnership, the preferred route to funding infrastructure, has not taken off commensurate with the expectations raised by the Finance Minister over the last two years, whatever the institutional and other lacunae, and Mr Chidambaram does concede the need for a "more aggressive approach" for preparing a shelf of bankable projects for competitive bidding.

A couple of proposals for funding infrastructure in the Budget, including a new mechanism to use part of foreign exchange reserves figure in the Budget speech, but altogether, poor marks on infrastructure.

Jobs & Education

The less said about employment the better. As in agriculture, so in employment, strategies are still in the making. The Planning Commission says 70 million new jobs will have to be created during the Eleventh Plan. Services apart, manufacturing has a dismal record in job generation.

Two welcome proposals are upgrading of industrial training institutes as also the Government's readiness to subsidise employment of 100,000 physically challenged persons by employers in the organised sector, usually vociferous in their demands on Government, but deafeningly silent when it comes to certain social obligations.

It would be unfair to deny credit to the Finance Minister for attempting to give a push to education, primary and secondary, in the Budget and an additional one per cent cess would be borne ungrudgingly if we can maximise efforts to provide compulsory education for children up to age 14, provided teachers are in attendance and the schools have all the basic facilities in place.

Budget Support

While the well-received National Rural Employment Guarantee Programme is being extended from 200 to 330 districts in 2007-08, Mr Chidambaram has also held out promise of additional Plan funds of Rs 7,000 crore through better tax administration for investment in critical sectors, including agriculture, rural development, health, women and child development.

Much depends on the growth of the economy in 2007-08 which in assumed at 13 per cent at market prices, which means unless inflation is controlled within 5 per cent, GDP growth cannot be higher than 8 per cent.

Budget support in 2007-08 in the first year of the Eleventh Plan, at Rs 2,05,100 crore, would be 135 per cent of the fiscal deficit, showing excess of Plan expenditure over fiscal deficit, which is considered a positive.

Also, for the first time in the process of fiscal correction, a primary surplus of 0.2 per cent of GDP is estimated in 2007-08 (that is, fiscal deficit less than the interest payments by Rs 8,047 crore). But there is no indication of any significant increase in asset-creating capital expenditure.

S. Sethuraman
(The author, a former Chief Editor of PTI)

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