| Monsoon largesse
Pervez Musharraf, when explaining his pardon to the nuclear scientist, Abdul Qadeer Khan, complained about the penchant of the Pakistani media for juicy stories and headlines as against his “reality”. The Economist calls President George W. Bush’s budget “election year face; nice glossy brochure, not much fiscal responsibility”. They might complain, but Jaswant Singh has greater justification when the media comment that his mini budget is populist, with sops for key Bharatiya Janata Party voting classes and inconsiderate about the good of the country.
Jaswant Singh started making fiscal announcements well before the elections were announced. He said clearly that budgets are political statements and he would use them to influence electoral constituencies. Has he ignored the country and its economy for the sake of electoral advantage'
The charge is absurd. Populist measures are those that target benefits towards key sections of the electorate at the cost of the country. The measures in this mini budget cannot be termed populist. It appears to be a carefully worked out set of measures that are consistent with past policies and future needs. The measures that might seem populist are the merger of 50 per cent of the dearness allowance for government servants with their salaries and the measures for agricultural credit.
The DA measure is certainly unfortunate but inevitable and less disastrous than the enhancement of pay commission recommendations by the former prime minister, I.K. Gujral. It will mean a substantial additional immediate outgo if house rent is calculated on the merged DA and large future liabilities on pensions and other benefits. It will hit finances of state and local authorities that will be compelled to follow. But it will certainly make the millions of government servants at the Centre and in the states look kindly at the BJP/National Democratic Alliance when they cast their votes. Any other political party would have chosen such an advantage against the risk to the economy.
The measures to improve availability and cost of credit to agriculture through more kisan credit cards, enhanced limits, lower interest rates and so on, debt restructuring for tea and sugar, were overdue. Interest costs to industry range from 7 per cent to 9 per cent. Banks earn a good profit at these rates. Why then should farmers pay so much more' Asking banks to reduce but not subsidize credit costs to farmers is in the interests of the economy. Public investment in agriculture should have been much more than it is.
The railway budget did not raise passenger fares nor correct the imbalance between them and freight rates. Nor does it propose the massive investments required. But the railway proposals are hardly populist. They just show lack of courage. Railways must have a non-lapsable exclusive investment fund but be a part of other government finances. Even a minister like Nitish Kumar, from whom much more was expected in comparison to Mamata Banerjee, has been unable to grapple with the fundamental problems. The Rakesh Mohan committee made farreaching proposals that could have transformed the railways, but they have been ignored.
Duty reductions and measures to improve the attractiveness of investment in power follow the earlier reduction in duties on equipment and the mega project policy. They cannot be faulted since we want lower power costs. Taxation is a major element in project costs, fixed charges and tariffs.
The reduction in customs duties and abolition of the special additional duty is in keeping with earlier promises. It took courage, with elections around the corner, for the finance minister to reduce duties. It signifies a commitment to reforms. So do the provisions for revenue from disinvestments. As shares get sold (in the oil companies), it becomes easier later to sell the whole company. Maruti is a good example. K. Karunakaran and his secretary were against selling it to Suzuki. But selling shares began the process of transferring ownership, control and management from the government to Suzuki. The creation of a non-lapsable defence modernization fund with a revolving corpus is an excellent innovation and must be applied to other key sectors like roads, railways, water and power as well.
The Central Statistical Organization’s initial estimates for 2003-04 (against 2002-03) are for gross domestic product growth of 8.4 per cent (3.5), agriculture 9.1 (minus 5.2), manufacturing 7.1 (6.2), electricity, gas, water 5.4 (3.8), construction 6 (7.3), mining and quarrying 4 (8.8), trade, hotels, transport, communications 10.9 (7).
The finance minister has said that he expects next year’s GDP growth to be 6.4 per cent. Agriculture added roughly 3 per cent to overall GDP this year. Next year, even with a good monsoon, agriculture cannot grow by more than 3 per cent, adding less than 1 per cent to GDP. GDP growth of 6.4 per cent will therefore require significant improvement in industry and other sectors.
Industrial growth requires demand and investment. Demand for consumer goods from rural India this year may rise because of the buoyant agriculture. So might demand for industrial goods and infrastructure services like power, ports and so on, because of public investment in road schemes and now in new power projects. But private investment still has to show growth. It has easy access to cheap domestic and external financing but the equity to leverage borrowings is yet to be raised. A private investment boom is expected soon. Overall industrial growth next year must approach 9 per cent for the overall 6.4 per cent to be achieved. Hotels and services will grow a little faster but infrastructure and mining have to improve. GDP growth of 6.4 per cent is modest but will be a challenge.
Inflation this year is expected to fall to 4 per cent or so. This seems unlikely even with the sterilization of excess liquidity. Inflation is now at the cusp and is not restricted to fuel and power. Import costs will fall with the dollar but fuel, power, steel, cement prices will rise. Primary product prices could fall. Massive public investment, high fiscal deficits of the Centre and states together, rising foreign exchange reserves and the ever present danger of a poor monsoon are factors that will fuel price rises. Lower GDP growth and inflation will raise deficits and prices.
The fiscal deficit is shown as having been reduced this year and is expected to fall further next year. High GDP growth, corporate tax buoyancy, high dividends from public enterprises, high interest loans repaid by states and replaced by low interest loans and savings on expenditures, have enabled lower fiscal deficit to GDP this year. Savings because of lower interest rates and reduction in subsidy commitments with the food mountain (exported or used for special schemes) and the kerosene plus LPG subsidies being partially paid for by oil companies, are other causes. The transfers to states from the Centre have declined both on non-plan grants and on assistance to plans. The assumptions behind fiscal deficit reduction for next year have too many imponderables. The target is not merely ambitious but probably unachievable.
Continuing GDP growth demands a boom in primary equity, widespread productivity improvement in industry and services, massive public investment in roads, sanitation, water supply, power, railways and ports. It requires improved productivity in government and staff reduction. Public sector enterprises in manufacturing, banking and services must improve productivity and profits from distancing of government from management and massive disinvestments. To increase investment and eliminate corruption, red tape must be reduced. Social expenditures are inadequate. Carrots and sticks to states as with the accelerated power development and reform programme in the power sector must be more widely used.
We might feel good but there is little certainty about present growth trends being sustainable. Inflation could stymie the best plans. The mini budget barely addresses these issues. It is a political document that is not populist, does not backtrack on reform but leaves many issues untouched.