What was striking about the budget presented by Jaswant Singh on February 3, 2004 was the ruckus preceding it, arising from technical objections raised by a number of members of parliament. One of the most trivial was that the words, “interim budget”, were not included in the Constitution. Neither, for that matter, is the word “budget” itself. The Constitution, to the best of my knowledge, recognizes only the annual financial statement. But that has not prevented interim budgets from being presented in Parliament. Indeed, the very first budget of independent India was itself an interim budget, presented by R.K. Shanmugham Chetty on November 26, 1947. Many interim budgets have been presented since then. None of them has been put to a technical objection as Singh’s. Perhaps, the opposition was afraid that he would be filling his budget with goodies as he did his mega mini-budget of last month.
As it happened, the interim budget itself was very much an understated affair. It did not go to town with extravagant promises or concessions or announcements. It was a highly professional job, dedicated to the task of laying an annual financial statement on the table of the house and obtaining a vote on account. It had, of course, its quota of announcements and indications of actions on the tax front. But, these were minor and not calculated to make the voters drool over prospects of goodies. It speaks of the finance minister’s high sense of professional responsibility that many of his promised actions were referred to as matters to be studied and acted on.
The highlight of the budget was, of course, its achievement of compression in fiscal target from 5.6 per cent in 2003-04 to 4.4 per cent in 2004-05. Similarly, the revenue deficit has been reduced by 1.2 per cent from 4.1 per cent of the gross domestic product to 2.9 per cent in 2004-05. Significant accomplishments in the context of the promise the finance minister made that fiscal consolidation was one of his priorities. True, some of the fiscal deficit reduction has come about because the denominator (GDP) has itself gone up. But, we cannot also ignore the significant compression of expenditure, especially of subsidies, thanks to lower food stocks and lower interest costs of Food Corporation of India loans.
One of the interesting features of Singh’s budget is that he has made the banking sector pay for his largesse. Significantly, he has asked the public sector banks to give special loans to the farming sector at 2 per cent below the prime lending rate. Obviously, this will be at the expense of their bottom-line or at the cost of higher interest rates to other borrowers. The finance minister’s attempts to micromanage banks’ operations by asking them not to insist on full collateral for loans are also likely to be misunderstood and misused. The Reserve Bank of India and the National Bank for Agriculture and Rural Development should tread warily when the interventionist finance ministry tries to poke its nose into what is basically the RBI’s terrain. But I am sure the finance minister would have already tied up this group’s response and cleared all impediments.
An interesting feature of Singh’s budget is the determination to give a stimulus to investments. To this end, he has also declared that it is his intention to place the Industrial Development Bank of India back as the lead development finance institution. This is a necessary correction to the harm done to development finance since the inception of reforms. But, it is also important to ensure that the IDBI together with the state finance corporations improves its governance and sensitivity to the needs of the target industrialists. “Delay” can be dangerous in development finance. So can refusal to attend to legitimate difficulties, which entrepreneurs face in the actual working of industries. A positive industry-friendly attitude has to be encouraged among our financial institutions, without at the same time jeopardizing their accountability. This requires a revision of codes of conduct, vigilance and investigation, lest cupidity win over enterprise.
The budget has incorporated a number of investment-friendly initiatives. One of these is the decision to extend the concession to power investments. Another is the announcement that cross-border entities associated with business process outsourcing activities will be treated as ancillary. Hopefully, the draftsmen of the revenue department will succeed in giving effect to the finance minister’s intention to give relief instead of confusing the issue further.
The finance minister has also struck a blow for stock markets by extending the capital gains tax concession for listed equities. This will boost the sensitive index. The finance minister has also saved the capital goods industries of India from facing a non-level playing field by giving them a deemed export status when they supply goods to projects. The details are still to be worked out. But, this is definitely good for indigenous capital goods producers and their suppliers.
The finance minister has announced the merger of 50 per cent of dearness allowance with basic pay — a decision, which follows the recommendation of the pay commission. While it is true that this may be a vote-catching device, its fiscal impact, even including that of the states, cannot be too large in relative terms in a growing economy. The finance minister’s other gestures to the middle class, like enhancement of house rent allowance in certain outlying locations, are similarly of marginal significance.
That the finance minister has been careful not to give up his “stimulus” orientation augurs well for the economy. His budget combines a vision of growth with equity, of expansion of opportunities for all enterprises. If it is intended to send a message of good cheer to the public, which is going to the polls, so be it. It is the finance minister’s right to use his budget as a document to inspire his troops. He has been restrained and responsible.
The finance minister has announced a number of investment initiatives, especially in respect of health. Particularly, his decision to establish six new all India institutes of medical science will create world-class institutions in medical education. It is an initiative worth applauding as it recognizes the primacy of health in India’s national agenda.