Business   

Debt waiver package characterises budget

— PHOTO: SHAJU JOHN

ALL SMILES: Farmers working at a nursery in a village in North Arcot, about 100 km away from Chennai.

There are always big question marks over the common practice of judging or labelling a complex economic exercise such as the Union budget instantaneously on its presentation. In many cases, even before the Finance Minister completes his speech the labels are out. This is partly due to preconceived notions before the budget day on what the contours of the budget would be.

Important pre-budget announcements such as the Economic Survey and the Railway budget naturally influence such subjective assessments but the point is this: a considered opinion with minimal bias is possible only after a detailed analysis, which obviously takes time. But commentators, who have already made up their minds on what the budget would be (or should be) and expressed them in the print or visual media, naturally look for and get corroboration in the budget document.

For instance, infrastructure has always been a pressing concern in India. No government can obviously ignore it. Commentators who were expecting a few significant schemes — such as more details on the proposed deployment of forex reserves for infrastructure funding — scrambled to look at a number of announcements before concluding that the Finance Minister has taken care of infrastructure needs.

Of course, further reforms announced to develop the corporate bond market were rightly taken to be a huge positive for infrastructure. Long-term sources of funds for infrastructure projects can be sourced from a vibrant corporate bond market. But the benefits of a well developed bond market go well beyond infrastructure finance.

Stock markets’ reactions to the budget speech play a major part in influencing the opinion of other commentators. The budget process is hyped to a degree where most people are apt to mistake the glitzy process of disseminating budget news through several TV channels for the content. Even as the Finance Minister reads his speech, the gyrations in stock prices are taken to be a vote for or against specific announcements.

The announcement of the debt waiver package for farmers in this year’s budget was some kind of tipping point in the markets’ assessment of the budget. As one commentator put it, if an investor had gone short (sold shares) at that time he would have made plenty of money by buying at sharply lower levels a few minutes later. Yet, stock markets’ instantaneous responses are often of the knee-jerk variety.

A good analyst should be able to go beyond these. The bank loan waiver plan, as elaborated by the Finance Minister later, seems to be more complex than just a write off of agricultural loans outstanding on a particular date. Initially, there were doubts as to who would bear the burden — the banks or the government. Mr. Chidambaram has promised ‘liquidity’ for the banks.

Whether this amounts to compensating them remains to be seen but this is central to a number of related issues _ for instance, autonomy of government owned banks and power of government to dictate a commercial banking decision.

The point has been made that even if the government foots the bill, there are moral hazards in that borrowers who are prompt in repayments are penalised while those who default are rewarded.

The Radhakrishna Committee, whose findings were referred to by Mr. Chidambaram, wanted a culture of repayment to be emphasised. The expert group has recommended rescheduling of loans and waiving of interest burden up to two years as well as grant of fresh loans in respect of farmers affected by natural calamities.

The burden of interest waiver should be shared equally between the Centre and the States. In its considered opinion, agricultural indebtedness is only a symptom of the agrarian crisis which needs to be treated in its totality.

In fact, in many parts of the country farmers are dependent to a greater degree on money lenders and other informal sources. The high interest charged by them is a major concern. Formalisation of this informal credit channel is the first step. The recent budget does not address this issue at all.

All these are no doubt very relevant, but on budget day they must have been far from most analysts’ minds. But the loan waiver package, more than any other announcement, has helped in providing a label for this year’s budget. Inevitably, the budget has been called an election-eve budget.

There are, of course, other measures meant to please the middle-class, the manufacturing sector, the farm sector and practically every constituency.

But none of these, including reliefs in personal tax, would by itself qualify to be an election-eve statement. Only the debt package stands out, not only for its size but also for its stance, which even a strong votary of reform such as the Finance Minister is willing to embark upon in his last ‘full’ budget.

On budget day, the stock indices closed lower, although they had recovered from the day’s lows.

The raising of short-term capital gains tax from 10 to 15 per cent is said to be a dampener. The budget has not provided the stimulus to overcome the negative sentiment flowing from global factors. There were perhaps unrealistic expectations from the budget.

Printer friendly page  
Send this article to Friends by E-Mail

Stories in this Section

Debt waiver package characterises budget
Efficient use of rolling stock earns more profits for Railways
Amendments proposed in the Finance Bill, 2008
CDB’s efforts to export raw nuts pay dividends

Copyright © 2008, The Hindu. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu