The finance minister’s sixth budget was presented against a backdrop of an economy growing at a remarkably rapid pace, but at the same time also experiencing inflationary pressures, particularly in food items. So, the main economic objectives (there must have been political ones as well) were to ensure that the economy continued to remain on the high-growth path, but in an environment of relative price stability.
These twin objectives are not always easy to satisfy. Typically, the prospects for growth are enhanced by the pursuit of expansionary fiscal and monetary policies that stimulate aggregate demand. On the other hand, suppressing demand through contractionary fiscal and monetary policies can curb inflationary pressures. However, P. Chidambaram, the architect of the “dream budget” of 1997 as well as of the service tax, is perceived to be no ordinary mortal. Everyone expected him to pull several rabbits out of his hat, and achieve the impossible. Unfortunately, this year’s budget has managed to disappoint practically everyone.
But it is unreasonable to set the bar too high because failure then becomes almost inevitable. Perhaps, it is more helpful to undertake a more objective evaluation. It is also important to take into account the overall political environment because economic policies are not made in a vacuum.
Does the budget exhibit any clear strategies at all or is it just a set of ad hoc measures' Chidambaram has done very little to contain inflation in the short-run, except perhaps to reduce import duties on some items of common consumption such as sunflower-oil. As far as the long-run fight against inflation is concerned, he has sought to ease supply constraints by emphasizing the need to increase agricultural production, particularly of critical items such as pulses.
He has taken a passive stance insofar as stimulating growth of the private sector is concerned. The budget is bereft of any measures that are explicitly designed to enhance growth. At the same time, he has not imposed any new taxes that can act as obstacles for the growth of the private sector. The finance minister’s main mantra this year has been the pursuit of “inclusive growth”, a growth process which benefits all sections of society. To this end, he has budgeted for relatively large increases in expenditure in the social sectors.
Could he have done more' Chidambaram has obviously taken the view that the current rise in prices is because of inadequate supplies of food items and other agricultural goods. This does not leave much scope for the use of contractionary fiscal policies. The only way to increase short-run supply is through imports. Perhaps, the finance minister could have been much bolder by reducing import duties on a whole gamut of food items whose prices have been rising. He cannot quite take recourse to the plea that revenue considerations prevented him from pursuing this approach. After all, he seems to have enough budgetary resources to reduce the duty on the import of pet food.
Most of the criticism directed against the budget has come from various industry groups who were expecting several tax concessions and perhaps big-ticket reforms. One cannot help feeling that the corporate sector in India often acts as a bunch of spoilt children who want to eat their cake and have it too. Over the years, the government has been relaxing various controls over the economy, and allowed entrepreneurs considerably greater freedom in running their firms. The fact that the economy has been growing at such a rapid rate demonstrates that the overall economic environment is not inimical to growth. Of course, the environment can be made more conducive for growth. Perhaps, the most crucial area crying for attention is the state of infrastructure.
Successive governments have always proclaimed the need to effect steep increases in investment in infrastructure. But there has been very little concrete action. This budget too is no exception, with the increase in infrastructural investment being quite small. The finance minister is a great believer in the model of public-private partnership. But in the absence of regulatory policies, which promise private entrepreneurs adequate returns on their investment, it is unrealistic to expect any large-scale investment from the private sector.
There are no “reforms”— big or small — in this year’s budget. This is almost certainly owing to the fact that the overall political feeling is strongly anti-reform. This rules out any possibility of big disinvestment exercises during the tenure of this government. The fact that the prime minister and finance minister are both reformists is immaterial — they constitute a tiny minority of pro-reformers.
The most positive aspect of the budget is the increased spending in the social sectors. It promises significantly higher budgetary outlays in health and education, as well as in rural and urban employment schemes and insurance schemes for unorganized workers. Overall increases in education and health are as high as 34 per cent and 21 per cent. What is particularly important are initiatives in school education. New schools are to be built, more teachers to be appointed and a small scholarship scheme for class VIII students will be launched.
Several critics question the social usefulness of higher spending on welfare schemes “in the absence of proper delivery schemes”, claiming that there are significant leakages from all such schemes. But there is some amount of corruption built into perhaps all government projects. Consider, for example, the huge controversies related to corruption in expenditure on arms and ammunition. No one suggests that we should not spend on defence on account of leakages. Why should spending on the social sectors be evaluated according to a different yardstick'
A somewhat inexplicable feature of the current budget is the relatively small increase in estimates of both total expenditure and revenue. The growth in gross tax revenue is budgeted to be only 17 per cent, this being the smallest in the last five years. This is surprising in view of the tremendous buoyancy in tax revenue exhibited during the current year. Given, say, an average inflation rate of 5.5 per cent and real GDP growth rate of 8 per cent, this virtually assumes that the increase in tax revenue will just about keep pace with the growth in nominal GDP. One wonders why the finance minister has not been more optimistic about greater efficiency in tax collection.
This is not an innovative budget, and not one that will be talked about for years to come. The only new feature of the budget is that it does put greater emphasis on social-sector spending than most other budgets that one can think of in recent times. Moreover, there is no feature about the budget that is particularly indefensible. Perhaps, the best label for it is that it is a “safe” budget designed not to ruffle too many feathers.