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Budget making for 2007-08 Challenges before Chidambaram
October, 18th 2006


The Budget has to be framed to reinforce positive trends and remove obstacles to marshalling and utilising resources and the full exploitation of India's competitive advantages. The starting point for this exercise is for the Finance Ministry to undertake a Ministry-wise, programme-wise, evaluation of achievements against allocations and announcements, says B. S. RAGHAVAN.

THE FINANCE Minister, Mr P. Chidambaram... Time for out-of-the-box solutions.

Viewed purely as a book-keeping exercise, Budget making for 2007-08 does not present any complications. The Finance Minister, Mr P. Chidambaram, in fact, had never had it so good. Collections of the corporate, income and indirect taxes in the first half of 2006-07 have shown an increase of 32 per cent over those of 2005-06 (from Rs 89,678 crore to Rs 118,270 crore). The whopping 67 per cent rise in the corporate tax (from Rs 13,258 crore in 2005-06 to Rs 22,587 crore in 2006-07) and the growth in the proportion of direct taxes (from 32 per cent to 36 per cent of the total) are indicative of the buoyancy as well as vibrancy of the economy.

There has been a more than 30 per cent spurt in corporate earnings in the quarter ending June 2006, compared to the same slot the previous year. For the 12th straight week since July 24, the Sensex has pointed northward at the close of the day's transactions, climaxed by the record high on October 13. The GDP growth of 8.9 per cent in the first quarter is taken by many observers to hold the promise of even better performance. Well may a daily splash the exultant headline: "West says, head for India"!

Economy on auto-pilot

To maintain political correctness, the Finance Minister may not talk of `India Shining', but that is what it is doing in both fundamentals and overall economic management. The mutually-reinforcing team of Dr Manmohan Singh, Messrs P. Chidambaram and M. Damodaran, and Drs. C. Rangarajan, Montek Singh Ahluwalia and Y. V. Reddy is the best thing that has happened to the country since Independence. The fact deserves to be celebrated without any stinting.

Indeed, the nation's economy can be said to be on auto-pilot, with Mr Chidambaram having to do very little by way of active intervention (his fiat of a few months ago to banks not to raise interest rates being a misguided foray into unjustified micro-management). Deregulation, divestment (to the extent undertaken) and autonomous decision-making in key areas by economic players have transferred a chunk of the onus to keep the economy on an even keel from the hands of the Government to India Inc and the regulatory authorities set up to mentor sectors such as stock exchanges, telecommunications, power and information technology. All this is as it should be.

But all this does not save the Minister from his responsibility for proper financial housekeeping and giving a fillip to factors keeping the economy aloft. That means the forthcoming Budget has to be so framed as to reinforce, and even give a push to, positive trends and remove the obstacles in the way of marshalling and utilising the maximum possible resources and the full exploitation of India's competitive advantages. The starting point for a purposeful exercise in this respect is for the Finance Ministry to undertake, as a prelude to the usual number crunching, a critical, ministry-wise, programme-wise, evaluation of achievements as against allocations and announcements.

To give him his due, Mr Chidambaram did bring out in the last two years a document setting the outcomes in relation to outlays, but it only listed bare figures without making any attempt at in-depth scrutiny and analysis indicating how the shortfalls noticed are proposed to be made good, what measures are being taken to remedy the administrative and operational deficiencies, what incentives are envisaged for improving the input-output ratio, and how the lessons are going to be applied in making future budgetary allocations.

It will vastly enhance the credibility and authenticity of the Budget if, along with the Economic Survey, an outlay-outcome study for the period April -December 2006 is also made available for the information of Parliament and the public.

Serious lacuna

This will also have the advantage of alerting the Finance Minister on the extent of likely deviations from the milestones prescribed in the Fiscal Responsibility and Budget Management Act and from the preconditions suggested by the second Tarapore Committee for moving towards full capital account convertibility.

One of the serious lacunae in Budget making is the neglect of the vital importance of disciplining the States, through a carrot-and-stick policy, to adhere to the canons of financial prudence, propriety and probity. While at the Centre, economics and politics are not mixed up to any damaging extent, the State finances are entirely at the mercy of populist recklessness. Most of them are caught in the coils of vicious caste-ridden local politics compelling them to placate their respective vote banks by wasteful giveaways. So much so that it is doubtful whether the Prime Minister's recent warning to States against profligacy will be heeded by them. The extolling to the skies by Mr Chidambaram of the DMK's thousands of crores of rupees worth of freebies can only serve to instigate other States too to indulge in similar sprees.

Any Budget-making at the Centre, turning a blind eye to State's finances, their mounting fiscal deficits and debts, is to overlook the linkages and interfaces that are increasingly coming to the fore propelling financial policy-makers towards a holistic approach for the management of the nation's finances. For instance, if the Centre, for political reasons, keeps bailing out insolvent States, its own finances will face jeopardy and its plans will be crippled. The Finance Minister will be doing a public service by building into the Budget stringent conditionalities to deter the States from running amuck on the financial front.

True to Gandhiji's dictum, "you be the change you want others to be", the Centre should itself set an example by drastically slashing expenditure on staff, reducing the number of posts, enforcing performance benchmarks for the different grades of its personnel (all strongly recommended by the Fifth Pay Commission) and pruning non-merit-goods subsidies identified as such in a report Mr Chidambaram himself had commissioned when he was Finance Minister in the Deva Gowda Ministry.

Farmer suicides

Next year's Budget cannot just be a repetitive litany of the familiar schemes, although it may be necessary to continue the deserving ones in the same or different names for the sake of continuity. For instance, increased allocations to the Bharat Nirman group of enterprises, including the National Employment Guarantee Scheme, and anything that can speed up rural development cannot be grudged.

The President's concept of PURA (provision of urban amenities in rural areas) is worth trying out as a pilot project in selected areas by earmarking the needed funds.

Lurking behind these obvious recipes, are two formidable challenges which the Budget has to look squarely in the eye and come up with out-of-the-box solutions. The first is agriculture. It is a tragic irony of monumental proportions that a country in which 70 per cent of its population is engaged in farm-related activities, should be witness to farmers committing suicides in their thousands out of a sense of shame for their inability to repay loans which could only be called minuscule compared to the thousands of crores of rupees plundered by dishonest politicians and officials who continue to strut with impunity. There can be nothing more shocking than the fact that 40 per cent of the farmers want to quit farming because of the sufferings they undergo.

By happenstance, the interim report of the National Commission on Farmers mooting a comprehensive policy for resuscitation of agriculture has just been presented to the Government. The chief elements of what it calls a Livelihood Security Package for Farmers are: Commensurate investment to guarantee a 4 per cent growth in agriculture; expanding the scope of minimum support price to cover all crops; linking crop diversification programme with minimum support price; establishing a market risk stabilisation fund to protect farmers during periods of violent price fluctuations; creating an agricultural risk fund to insulate farmers from climatic aberrations; and widening the scope of agricultural insurance. Mr Chidambaram could do nothing better than giving a practical shape to these ideas and make suitable provisions in his Budget.

The second challenge that has remained intractable is to implement a massive national infrastructure development programme to match at least the 10-15 per cent growth India must aim at for ensuring sustainability in relation to population. The needed investment has been estimated at as high as $150 billion. The Prime Minister has pinned a lot of hope on private-public partnership (PPP) which, he feels, will help catch up with the requirement. How to make a success of PPP in a big way is the question that will test the ingenuity of Mr Chidambaram to the utmost.

Agriculture and infrastructure: Those are what the Budget for 2007-08 should be all about, as those are what are going to determine the pace and quantum of India's economic development.


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