| Well-heeled in economic logic
The author is director, India Development Foundation
When I first received the sealed packet containing the budget documents early in the morning at Doordarshan’s CPC office, I was sure that one part of the budget speech was missing. It was only after about ten minutes of panic that I realized that this year’s budget had no second part. I was thrilled that a finance minister who cannot be termed a young turk was implementing this break with tradition. I was ready for the unexpected.
And yet, as I turned the pages, the budget continued to spring surprises in every chapter. The finance minister talked about poverty eradication, not alleviation. One had heard a similar phrase long ago, in the Seventies. Maybe it will be realized this time around. And I say that simply because it appears that the FM has no interest in starting a spate of new programmes to eliminate the problem of poverty. Much of our poverty alleviation programmes have been more political and corruption-enhancing. Instead, the current budget attempts to empower the poor through a spate of social and physical infrastructure projects that directly affects the environment in which the poor operate. For once, somebody seems to understand that the poor know best how to climb out of poverty; they only need to be able to make their own choices.
The organization of the content in the budget has also been excellent. In earlier years, one had to look separately at the direct tax sections, the indirect tax sections and various other sections to know what is the total impact of the budget on a particular sector. Here, all sops to the textile sector are mentioned together, in one place. Also, the prioritization of goals, mentioned at the beginning of the speech, has been honestly addressed, one by one, in the rest of the budget. Before we come down to the nitty-gritty of the various proposals, let me record my appreciation for the consistency in the thought process behind the budget. The focus is unfailingly on enabling markets and fostering growth.
Why do I say this' Let us take the health sector. The budget initiates a health insurance scheme that will cover medical expenses for the poor. The government has promised to contribute Rs 100 towards the premium for 50 lakh households who are below the poverty-line. Many budgets have shown similar, if not this exact, concern for insuring the poor. Few, however, have gone the next step and asked themselves what good can an insurance policy do if the only doctor you have access to is a public health clinic many miles away which has no medicines or equipment' This budget, on the other hand, simultaneously announces that hospitals will be treated as infrastructure, thereby allowing private hospitals to come up. Since their patients will have insurance to pay with, there is a market for health services. The health sector can now be truly developed. Indeed, it is heartening to see that there is very little mention of employment-generation for the poor. Instead, it enables a sector that is the most labour intensive sector in the world. This is more than good economics; it is good policy.
Consider education. The current budget does not talk about education as a fundamental right, enshrined in the Constitution. Instead, it simply states that educational expenses up to Rs 12,000 per child, for two children, will be tax exempt. Once again a simple solution — no projects, no expenditure, no high-level government initiatives! Although, I must say, that while this will allow the tax-paying public to spend that extra amount on their children’s education, there are less than 3 crore taxpayers. What will happen to the child whose father does not pay taxes' Will we grow fast enough for this child’s father to have enough income to save on taxes through educating his child'
A major plus in this budget is that it has consistently focused on growth. There have been a few times before this that budgets have talked about infrastructure as an essential means of unleashing growth. They had the right idea but not necessarily the right perspective. This budget, on the other hand, has taken adequate precaution to ensure that the planned infrastructure development takes place in an environment where markets are growing. Such growth in markets can be supported only by a growing aggregate demand.
So, the budget tries to give more money in the hands of the potential consumers, raising, for example, the standard deduction on salary. More important, commodity tax reductions (both excise and customs), which have been announced, will lower prices of the goods they may want to buy. Production will rise, giving a boost to employment; once again a complete approach.
What the budget has tried to do is streamline the economy and grease its wheels. It has noted that banks hold too much of high-cost government debt, which in a regime of falling interest-rates should command a high premium. Unfortunately, it is difficult for the banks to cash in on this because they are thinly traded. So the government has offered to buy them back. The idea itself is nothing great. What is refreshing is that the budget does not say that the government will buy back so much of this debt, instead it offers to do so should the banks want. For those who have some regard for voluntary trades, this statement coming from the Indian government means a lot.
Proper financial markets are essential to channel investment into viable projects at low cost. India’s financial markets will continue to be largely bank-based for some time to come, regardless of the inane hype about the Indian stock- market behaviour in the media. Unless the Indian banking system is made more active, in terms of allocating and managing risk at low cost, new projects will not be funded. Without the latter, the 8 per cent growth rate of the tenth plan will not be reached, leave alone being sustained. This budget is aware of this and has relaxed the foreign holding limit in private banks to 74 per cent, allowed private banks to merge with nationalized banks and opened up rural banking to private players. All master strokes with great implications. Simultaneously, it has made mergers and acquisitions more profitable by doing away with the capital gains tax on successful acquisitions.
And finally comes one big disappointment. I wanted the Kelkar committee recommendations on exemptions to be implemented along with everything else that was there. Unfortunately, the exemptions continue. One understands that some of these involve promises whose terms have not yet expired. One still expected a time-frame by which they will be abolished. Nevertheless, I am elated that the committee recommendations on tax administration have been accepted in principle.
Almost everything in the budget seems to suggest that it is better to have a non-economist as a finance minister. He starts from first principles, takes nothing for granted and produces a scheme that is at least consistent. Frankly though, this budget smacks of a mind well-heeled in economic logic and not simply in economic concepts.