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Sunday, Mar 04, 2007
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A critique of the two budgets

Subramanian Swamy

The Railway Minister cannot continue with the present spree of quick fix budgeting. And, the 2007-08 Union budget is a hodge-podge of financial allocations without any strategy.

THE NATION has watched with awe two budgets being presented within the week — one for Railways and another for finances of the government. Where are these two budgets going to take the economy?

The Railway budget of Lalu Prasad has received kudos from all and sundry. Most media writers have described the 2007-08 Rail budget as the "best ever," with the Minister declaring a huge operating surplus of Rs.20,000 crore. On the other hand, the Union budget of P. Chidambaram has mostly been condemned as directionless, for lack of any economic reform proposal.

Railway Minister Lalu Prasad, however, does deserve some credit for producing a surplus by using the existing excess capacity in freight loads, reducing wagon and bogie turnaround time, mid-term hikes through rationalisation of fares, and utilising the existing track capacity to run new and longer trains. Since fixed cost in the Railways is over 80 per cent of total cost, increased revenue by greater utilisation of the railway capacity will naturally bring quick results as long as excess capacity exists.

But now after three budgets, the railway system has also hit the ceiling. It cannot be milked any more by Mr. Prasad without new rolling stock, gauge conversions, renovating rail tracks, and signals computerisation. That requires new heavy investment of long gestation lag. Hence, the Railway Minister cannot continue with the present spree of quick fix budgeting and getting instant credit. If he does so, then he will run the rail system to ruin within two years.

In fact, a close reading of the 2007-08 Rail budget shows precisely that: increase in traffic receipts will decelerate in 2007-08 to 13 per cent compared with a 16 per cent increase in 2006-07; hence the key Operating Ratio, that is, expenses divided by revenue will rise from 72 per cent to 79.6 per cent in the new budget. Budgetary surplus will accordingly rise much slower at just 11 per cent compared with 72 per cent this year. Thus, deceleration in Mr. Prasad's `magic' results has already set in.

The Economic Survey 2006-07 also notes that large investment will be essential for future required capacity augmentation (p.199). The Railways will need Rs.200,000 crore over the next five years to replace its ageing rolling stock and networking equipment. Where is that money accounted for in the Rail budget?

As for Finance Minister Chidambaram, he is also clueless about the sustainability of the high growth rates in GDP. He boasts that in no other Finance Minister's tenure has GDP grown so fast and for so long. But the sectors that have contributed to the growth have nothing to do with the Finance Ministry. The Economic Survey put out by his Ministry itself points out that nearly 70 per cent of the GDP growth is due to the service sector (p.1, para 1.4), and that too in private trade, transport, communication and IT, which are growing in spite of the meddling by the `other IT' — Income Tax Department of his Ministry. In fact, his new Minimum Alternate Tax (MAT) is the most retrograde measure one can think of to throttle the blossoming information technology sector.

In utilities — electricity, gas, and water supply — there has, in fact, been a deceleration in growth. Who is responsible for that except Mr. Chidambaram who has not authored a single reform since he took office?

The Finance Minister can easily contribute to growth by encouraging investment, for example, by giving tax incentives, lowering interest rates, controlling money supply, and giving tax deductions for services provided by companies to their employees. But this Finance Minister has done the exact opposite by frequent IT raids, taxing perks irrationally, raising interest rates on loans, and printing money to accelerate money supply beyond the threshold of 14 per cent a year rate, suffocating the economy with the high cost of capital and inflation. This is a sure prescription for stagnation, since inflation and the rising interest spiral are there for all to see.

Who else but the Finance Minister must bear the responsibility for inflation and rising interest rates? Inflation in essential commodities is entirely due to permitting forward trading in foodgrains — a brainchild of Mr. Chidambaram — and from the rise in money supply, that is, from illegal re-cycled foreign funds coming into the economy. This has been legitimised via the Participatory Note (PN) route. PNs are outside the purview of SEBI, and do not have to reveal their source of funds, a practice unheard of in the modern financial world.

Mr. Chidambaram was forewarned by the RBI and the SEBI, besides the Tarapore Committee, to discontinue PNs. But he disregarded their sane advice. Only now, when inflation has hit the economy, the Finance Minister has woken up to suspend forward trading in foodgrains. It is too late. But what about the PNs? Are they not used to launder the ill-gotten funds of some high-ranking politicians.

Moreover, if Mr. Chidambaram claims credit for the 9 per cent GDP growth rate, will he also accept responsibility for the poor investment in agriculture and the rising unemployment in the country? In the 2007-08 budget he has shed some tears for the agricultural sector. But by increasing allocation for the sector, the problem will not be solved. Agriculture needs major structural change in land ownership, marketing, and storage. There is thus no development economics in this budget. A closer look at the Budget documents reveals the following:

First, in the 2007-08 Capital Account, the Finance Minister has run up an estimated surplus of Rs.111,478 crore — the highest in the nation's history. Why would any Finance Minister have a surplus in the capital account, which is for development purposes? Shockingly, it is for financing the revenue deficit, which is purely inflationary.

Secondly, according to budget documents, fresh borrowings by the government to finance expenditure in 2007-08 is estimated at Rs.150,948 crore. But what is surprising is that interest payments on past loans in the coming year will be Rs.158,995 crore, that is, Rs.8,047 crore more than receipts! In the pie charts put out by the PIB, it is shown that for every rupee of government revenue, including fresh loans, 19 paisa comes from new loans, while for every rupee of expenditure, 20 paisa is the interest paid back to the banks. Government is in a debt trap already, one year earlier than what I predicted last year in these columns. This one single deterioration in the nation's finance should have sounded alarm bells in the Finance Ministry.

Thus the 2007-08 budget is an anti-developmental budget, a hodge-podge of financial allocations without any strategy, stated objectives, priorities, or direction. The former `Dream Budget' merchant is going to cause nightmares for the people.

(The writer, an economist, is a former Union Commerce Minister.)

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