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A new look at Budget
July, 30th 2009

This years Union Budget, presented by Pranab Mukherjee on 6 July, is largely appreciated for its enormous allocations on pro-poor schemes with a view to reducing poverty and making economic growth inclusive; but it has been vastly criticised for lacking measures to rejuvenate the sagging private investment to ensure industrial recovery and thus lift the economy from recession.

Even the finance minister himself accepts the criticism and hints that he will gradually unveil his reform measures to boost private business in the coming days.

Irrational funding: The FMs thrust area is undoubtedly rural economy. But irrational funding may prevent him from getting the desired results. Take, for example, the NREGP scheme, which is to provide 100 days job in a year to the unemployed rural poor. It has been allocated Rs 39,000 crore.

As per official estimates, there are 10 crore BPL families in villages. If we take a family to consist of four members on an average, there are roughly 40 crore poor people. If a poor man gets his full quota of jobs, he would earn Rs 10,000 a year with the minimum wage being Rs 100 a day. It means each member of his family gets his/her share of Rs 2,500 a year. This works out to even less than Rs 7 per day. Is it sufficient to remove poverty?

Getting even this amount will be possible only if funds reach their destination in full and the project is properly implemented. Rampant corruption, nepotism and inefficiency have become part of it, like that of other such schemes in the states. The per capita estimates of all such projects would come similar. It is astonishing that FM banks on these pro-poor schemes to raise demand to abate recession. Besides meagre funding, welfare schemes also suffer from their multiplicities, 19 in number, to jumble accounts and paper keeping.

The rational solution could be mixing up of projects into three broad groups such as job provision, including infrastructure building, education and health with total funding being kept almost the same.

The FM has presently allocated Rs 2.20 lakh crore on the pro-poor schemes, up from Rs 1.75 lakh crore of the past year. The NREGP scheme should be so framed as to provide jobs at least for 240 days to make it a meaningful way of poverty eradication. But many states like West Bengal will not find jobs to absorb people for so many days.

Here comes the need of linking infrastructure development with the project. If Rs 90 thousand to Rs 1 lakh crore is allotted for it and Rs 50-60 thousand crore is earmarked for building up village infrastructure, then road, electrification, school building, houses, hospitals and irrigation canals can be made in time specific and money specific ways.

These will give village people jobs and income as well to help them come out of the poverty trap. Similarly, all schemes on education, from Sarva Sikhsha Abhijan and mid-day meal to all those targeting the SC/ST and minority people, can be brought under a single scheme with an allocation of Rs 75-80 thousand crore, keeping away 20-25 per cent of it to reward meritorious students and their teachers as per Board examinations.

A likewise single scheme can amalgamate all separate projects on health, nutrition, sanitation and drinking water to be provided with Rs 50-60 thousand crore, keeping aside 10-20 per cent as incentive for doctors and nurses for staying and working in the villages.

These three broad based schemes, if implemented sincerely, are expected to fructify the necessary rural uplift to contribute to national prosperity. But the Central government should keep a strict watch on their implementation in the states.

Rural welfare schemes should, however, be supplemented with prosperity of the farm sector as well as of micro and small scale enterprises (MSEs). But irrigation and power scarcity stand in their way.

In fact, dwindling farm production over the years has caused supply constraint and alarmingly high food price in the domestic market. Moreover, a lot of MSEs are getting closed countrywide each year due to non-availability of electricity. Presently, the annual power shortage at the national level is about 15,000 MWH. But the FM has not expressed concern either about the second agricultural revolution based on public irrigation or on overhauling the power sector.

It must be kept in mind that mere augmenting agricultural credit cannot lead to prosperity of farmers. They must be shown ways of developing their loan repayment ability. Without rejuvenating agriculture and MSEs, the FMs target of 1.2 crore of annual employment will remain unfulfilled.

Unsuitable tax policy: Mr Mukherjee has neither made any mention of reforms in banking, insurance, retail trade, PSU, pension fund or labour law, nor provided tax sops to any significant extent to induce private business. As the pre-poll stimulus package of four per cent Cenvat reduction across the board and providing banks with Rs 3 lakh crore more of loanable fund have hardly impacted industrial recovery, private business expected some more stimulants in the budget but is disappointed.

For private sector rejuvenation, his only announcement is providing Rs 1 lakh crore for infrastructural development on public-private partnership although he has no roadmap for it.

The indirect way to induce private investment was to augment private demand through direct tax benefits, raising peoples disposable income. But he has just made a mockery by giving income-tax benefit of only Rs 1,000 up to Rs 10 lakh of taxable income. How much demand can it raise?

Rather he has made serious tax discrimination at different levels of middle class income. For example, a man with Rs 3 lakh of taxable income will pay, including cess, Rs 14,420 as tax, while a double of taxable income (Rs 6 lakh) will fetch Rs 86,520, that is, six times more in tax; a triple of taxable income (Rs 9 lakh) will fetch Rs 1,79,220, that is, more than twelve times in tax.

This can help fight inflation, but not recession. If the average tax liability is considered, it is 4.8 per cent, 14.4 per cent and 19.9 per cent, respectively, on these three levels of taxable income. So the mid-income group of the middle class people will bear the brunt of the tax burden; the latest NCAER estimate puts people earning Rs 2 lakh to Rs 10 lakh a year in the middle class whose number presently is 12.6 crore. They are seven per cent of the total Indians but account for 18 per cent of private expenditure and 36 per cent of private savings. But they are encouraged neither for consumption nor for savings in the tax policy.

The same study shows that people earning annually Rs 90,000 to Rs 4 lakh form the major consuming class. But they bear a tax difference of Rs 35,020 to definitely reduce their consumption propensities. So the FM could have used his tax weapon more prudently particularly when he himself asserts that our tax effort presently reaches 11.5 per cent and direct tax collection (56 per cent) outweighs indirect tax collection. As demand boost can reduce slump, forced saving can reduce food inflation. He chose nothing.

More importantly, he resorts to borrowing of Rs 4 lakh crore, out of a total budget of Rs 10 crore, which may crowd out private investment to aggravate economic slowdown.

One should keep in mind that the fear of low growth, both of the World Bank and the CMIE, is looming large. If this enormous spending cannot promote growth, it will bring in severe inflation. So he has taken a huge risk. But is it a calculated one?

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