FM proposes, Madam Disposes
- FDI in Retail The FM may have given hints about further opening up the retail sector, but Sonia's letter has stalled it
- Labour Reforms For years, India Inc has been clamouring for freer labour policies; there was talk that this year's Budget will give indications, but not in an election year
- Disinvestment Last year, the FM raised money by diluting GoI's stake in PSUs; but he's unlikely to mention the D word this year
- Broadbasing Tax Net He may increase the service tax rate and even include some new services; but don't expect agri tax
- Infrastructure GoI's intentions to hike allocations will be impacted by resource constraints
Agriculture Measures to improve productivity, enhance irrigation, and solve systemic issues like storage and distribution
Education Hike allocation for secondary education, help India become a knowledge economy by solving the problem of lack of skilled manpower
Health Focus on primary healthcare, especially in rural and semi-urban areas, and hike budgetary support
Infrastructure Initiate policies to woo investments, address the issue of power shortages, privatise airports, and sketch out a long-term vision.
***
Populism vs Reforms. Growth vs Inflation. Revenues vs Spending. Hard vs Soft Options. It's clear that finance minister P. Chidambaram has to grapple with several extremes and contradictions when he presents the UPA's fourth, and his sixth, budget this week. Ideally, he should ensure that the growth momentum is maintained, while putting sharper focus on social sectors in the run-up to state elections in Uttar Pradesh and Gujarat. But, in the light of recent events, how far can he achieve these twin objectives?
Economists think politics will overshadow economics this year. The two reformers—Chidambaram and PM Manmohan Singh—may find themselves in a bind. "Political considerations will overshadow all other concerns," feels D.H. Pai Panandikar of the RPG Foundation, who does not expect any major policy announcements. "The resource allocation for projects would be dictated by politics," adds Sunil Sinha, senior economist, Crisil. For NCAER's Shashanka Bhide, "the challenge is to maintain the economic momentum and keep headline inflation rate under check." Chetan Ahya, head (research), JM Morgan Stanley, believes that "the government is occupied with working out measures to sustain the current high growth but at the same time is also initiating steps to address the needs of the lower and middle income population".
Given this mindset among policymakers, big-ticket reforms may be out. For example, the FM could have hinted at allowing FDI in retail. But after the letter Congress president Sonia Gandhi wrote to the PM voicing her concerns on the subject, this is a no-mover. Although Chidambaram has taken a few steps to dilute government stake in PSUs, he is unlikely to use the word 'disinvestment' this year. Fortunately, experts believe that a lack of movement in this direction hasn't had an adverse impact on growth.
Even with such restrictions, PC can send strong reforms signals to the global community via one channel: by lowering duties. The advantage would be that these changes will help the government in two other critical areas—achieving high growth, and curbing inflation. Since rising prices are a matter of political concern in an election year, and both the finance ministry and the RBI have initiated changes to tackle it, this could turn out to be a policy masterstroke for Chidambaram. "Global investors look seriously at fiscal deficit and inflation," says N.R. Bhanumurthy of the Institute of Economic Growth (IEG).
Ashima Goyal, professor at the Mumbai-based Indira Gandhi Institute of Development Research, thinks that "sharp quantitative monetary tightening", which the RBI has done in the recent past by hiking interest rates and the crr limit, "deliver too large a demand and output shock while having little impact on inflation". Instead, she believes, a better idea would be to reduce costs by reducing duties, thereby bringing down the landed prices of food and intermediaries. "Import duties can be aligned to (the much lower) ASEAN levels," she adds.
PC has hinted he may reduce corporate tax rates by removing the surcharge. This too will send the right message to investors. And the FM can do it this year as government revenues are extremely buoyant due to high and sustained gdp growth rates. "Tax rates, whether corporate or individual, are higher than other countries and need to be brought down. The focus should be to broadbase the tax net, rather than on selective taxation of corporates and individuals," says P. Balendran, VP, General Motors India.
Lower duties will lead to an additional benefit. They will lower input costs for the manufacturing sector, lead to lower prices of finished products and, hence, higher demand. The net result: high industrial growth. However, PC will need to do a cost-benefit analysis as some sections of India Inc are bound to get hurt by lower duties. But, since most ceos think that manufacturing will be the "next big wave" after services and software, the FM should focus on the sector in this budget.
Obviously, the aam aadmi will get emphatic attention. Analysts say the four core areas of this budget will be emphasis on agriculture, extension of employment guarantee schemes, higher investments in health and education, and measures to woo investments in infrastructure. "Both social and physical infrastructure should receive maximum attention given India's keenness to emerge as a knowledge economy," says Nagesh Kumar of Research and Information System for Developing Countries (RIS).
Yet again, these priorities can help Chidambaram achieve purely economic ends. He can look at agriculture as a whole to trigger off a chain reaction to increase productivity and get rid of systemic problems. "The bigger issue in agriculture is to hike productivity. Storage of agri output needs to be looked at and the wastage in primary products has to be controlled. The budget needs to also look at areas like cold storage, refrigerated vans and dehumidified warehouses," saysFICCI's Amit Mitra. These can easily exert medium-term control over future inflationary pressures.
Additional allocations for education and health will also have a positive economic impact. "Education will help India become more competitive," feels B.K. Pradhan of IEG. Adds Amit Tandon, MD, Fitch Ratings India, "I think there will be a hike in expenditure on social sectors. This is based on the fact that skill shortage is described as one of the obstacles for growth, and investment in human resources is a must to achieve high growth rates." Saurine Doshi of AT Kearney calls for a "vision to understand the problem as a whole and offer a comprehensive solution".
At present, there are policy-related gaps in education. For instance, a major chunk of our budget is devoted to primary and higher/technical education, leaving a huge hole in the secondary and continuing-education phase. At just over 4 per cent, IngridSrinath, CEO, CRY, feels that state investment in children is "grossly inadequate", considering they constitute 45 per cent of the population. She says that the allocation figure has to increase to 10 per cent.
There's also a perception that the policymakers are still to come to grips with the issues confronting infrastructure, including roads, ports and airports. "The only thing holding the economy back is infrastructure. All other things are secondary," says Kumar of ris. The biggest hindrance, for instance, is power shortfall. In the Tenth Plan ('02-07), India is expected to fall far short of its target for power generation capacity. The result: the country has to add around 75,000 MW capacity over the next five years. Overall, India requires $320 billion investments over the next five years to bridge infrastructure gaps.
On a positive note, the finance ministry can easily hike respective budgets for social sectors, thanks to higher revenues. The Centre's net tax revenue in April-December 2006 was 37.6 per cent higher than the figure in the same period the previous year. During the same period, fiscal deficit was lower by 12.4 per cent compared to the corresponding period in 2005. Revenue deficit too was lower by 16.2 per cent. The credit for such macro-economic improvement should largely go to industrial growth, which clocked 10.8 per cent in the April-December 2006 period.
However, the delivery systems have to become more effective and efficient. Many economists are confident that money is not the problem vis-a-vis social sectors; it's the way it's spent. "What we require is administrative reform to improve delivery mechanisms and make it more accountable," contends Crisil's Sinha. Sunil Mehta, country head,AIG, goes a step further: "We have had an administrative infrastructure that served us well for 2-3 decades. Now we need to re-engineer it and improve its quality." But then, you can't even mention this in an election year.
