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Issues remain unaddressed in budget

Subramanian Swamy

The 2006-07 budget has no solutions for the pressing problems of the economy. Instead, we find a tax on kitchen tiles, packaged software, and share transactions just to make budgetary ends meet and not for dynamic policy.

THE IMPORTANCE of budgets for economic policy has gradually been reduced over the years since the 1960s. But media hype has correspondingly increased with instant analyses on TV screens. The Comptroller and Auditor General has found that more and more of government expenditure is outside the purview of Parliament. Moreover, with market reforms, government budgets have become less crucial for the economy. Budgets have also been devalued because Finance Ministers have not kept most of the promises they made. The 2005-06 budget for example had made a promise of allocating Rs.10,000 crore for tsunami relief, but actual budgetary spending was less than Rs.950 crore. Even earlier, this same Finance Minister levied a cess on education but diverted most of the collected amount to the Government's revenue expenditure. Such lack of accountability hurt the credibility of the budgetary process.

Most Finance Ministers in India have been those without an independent political standing that comes with having participated in a struggle or adhering to an ideological commitment. Bereft of such a standing, they cannot displease the vested interests that constitute their political high command.

For the two reasons of falling importance of budgets and lack of political standing of Finance Ministers, debates on the budget inside and outside Parliament have become insipid. Budgets have become accounting exercises and of concern mainly to business interests and chartered accountants. We rarely hear from Finance Ministers on the exciting questions of calibrating interest rates with money supply or deciding on the optimum foreign exchange rate for maximising foreign investment.

Hence, it is too much to expect that P. Chidambaram, placed as he is, will do anything bold in any budget to rectify the major problems facing the economy. He can at best tinker with the budget-making arithmetic.

What are these problems that require urgent attention today? I am not referring to poverty or unemployment, which are long-term problems that cannot be rectified by one or two budgets, but to those problems that can be solved in one budget. The first such problem is how to make growth broad-based. At present, it is the services sector that is contributing most to growth. This sector does not depend on the government, hence no credit for its performance goes to the government. Mining, utilities, community and social services, and agriculture do depend on government policies. Today these sectors are either slowing down or growing at a rate less than 5 per cent. Even the core infrastructure sectors are growing at just 4.5 per cent when the GDP is growing at over 8 per cent. Hence, this budget should have had measures to vastly step up investment, by providing incentives or by effectively inviting FDI to make these sectors grow faster, at least at 6 per cent if not more. There is nothing in the budget showing any understanding of this need. On the other hand, MAT and the FBT levies are bound to discourage those investments.

The second problem is to enable the budget to free itself from the straitjacket it is in due to fixed politically irreducible allocations. Defence (Rs.89,000 crore), police (Rs.13,680 crore), pensions (Rs.21,312 crore), services (Rs.11,779 crore), interest payments(Rs.1,39, 823 crore), and subsidies (Rs.46,214 crore) account for 95 per cent of the revenue of the government, leaving just 5 per cent for capital accumulation. Yet Mr. Chidambaram has provided no clue on how he proposes to get out of this straitjacket. There are, of course, ways to do so by re-organising resource mobilisation techniques and with more efficiency in the allocation of investment, but it will take a lot of space here to describe those measures. It is, however, urgent to carry out these financial reforms or face a crisis soon.

Thirdly, some imaginative steps are necessary to forestall the developing storm on the external front. Foreign exchange reserves have for the first time in years fallen, to $139 billion, while current account balance has after three years become negative. The rise in the last two weeks in the reserves is due to the Reserve Bank of India's panic buying of dollars in the open market and not due to healthy foreign investment inflow. Hence some steps should have been indicated in the budget to ensure that exports will rise faster and foreign direct investment will come into India in larger amounts in the future to change the downward trend. Otherwise we can have a major foreign exchange crisis in the next three years just as we had in 1990-91. In 1990-91, it was the NRIs who triggered the exchange run. Now it could be the dubious Participatory Note (PN), which the Finance Minister has placed outside SEBI requirements on disclosure. Along with NRI deposits, the PNs can trigger a foreign exchange crisis anytime since these are hot money instruments. PNs are often used to re-route hawala laundered black money back into India.

Development projects curtailed

Fourthly, it is scandalous that the 2006-07 budget has a huge surplus in the capital accounts (Rs. 84, 727 crore) to cover an equal deficit in the revenue account instead of the other way around. This means development projects are being curtailed to enable financing of the current expenditures of the Government. This is sure sign of developing bankruptcy in the Government. It cannot go on for long. Hence Mr. Chidambaram ought to have taken some measures for greater efficiency in the Government, of course something the Communist allies of the United Progressive Alliance would not allow.

Fifthly, the Finance Minister has betrayed the students by failing to allot the full amount of the cess levied (Rs.12,000 crore) to the education sector. Much of this money has been diverted to revenue expenditure. The CMP had claimed that 6 per cent of GDP would be allotted to education. We find in the present budget the allocation is a mere 3.1 per cent of GDP.

Sixthly, the 2006-07 budget should have contained measures to bring the economy back from the brink of a debt trap. At present about 23 per cent of the revenue is from loans taken by the Government from public sector banks, while 22 per cent of this revenue goes to pay for past loans in terms of amortisation and interest. In two years, re-payment of past loans will exceed new loans — which is a debt trap. A financial crisis is then inevitable. The loans that the government takes from banks means that investment funds available for the private sector is reduced. This implies that the growth rate will decrease soon. Already, because of this, manufacturing sector growth and profits have decelerated in the last quarter of 2005.

Seven, there are no stabilisation measures for the stock market. The present boom is being engineered by portfolio foreign money and not by primary purchase of new IPOs. In 2004, the primary market purchases were Rs.35,859 crore while in 2005 they fell to Rs.30,391 crore. This is a very unhealthy indication — that the Sensex booms while the primary market falls.

Thus, the 2006-07 budget has no solutions for the pressing problems of the economy. Instead, we find in this budget a tax is imposed, in the fine print, on kitchen tiles, packaged software, and share transactions just to make budgetary ends meet and not for dynamic policy.

We cannot be self-satisfied that the world is praising India. The world also praised East Asia in the 1990s as "growth tigers." One day in 1997, there was a financial blow-up in East Asia, and we have not heard of the "tigers" again. The same happened to Argentina, Brazil, and Chile. In no time, it can happen to India since the financial fuse is short and burning.

(The author is a former Union Commerce Minister.)

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