The Hindu Business Line : Jaswant singh's maiden Budget

Having to walk the tight-rope between political compulsions and the need to boost the growth rate by creating demand, the Finance Minister has opted for such measures as cutting income-tax and excise taxes and doing away with dividend tax, hoping that people will spend the extra cash on consumer goods. But will these, and the Budget's other incentives, do the trick, asks Alok Ray.

A BUDGET has to be understood against the backdrop of the economic and political compulsions of the government. The political compulsion of elections being round the corner in several States is no secret. So, it had to be a please-all Budget, as far as possible. But the Finance Minister, Mr Jaswant Singh, could not be totally oblivious to national economic priorities. His job, then, was to walk the tight-rope between these conflicting objectives.

The growth rate of the economy has slumped to 4.4 per cent, mainly due to a negative 3.1 per cent growth in agriculture. The Finance Minister cannot be held responsible for drought. Nonetheless, boosting the growth rate by creating demand must be the government's top priority.

There is a lot of under-utilised production capacity in the industrial sector. Inflation, thankfully, is still low, though there are signs of it picking up. It has to be kept in check for both political and economic reasons. In particular, if the inflation rate shoots up, there goes the logic for keeping nominal interest rate low.

Pressure would build up for raising the interest rate, negating all the good work done over the years to move towards a low interest rate regime, essential for controlling the debt servicing cost of the government and the private sector.

Everyone agrees that physical infrastructure (power, transport, communication) is the biggest constraint on more private investment — both domestic and foreign. Building social infrastructure (education, health, social security), apart from being a means for economic development, is a highly desirable end in itself. Finally, in addition to increasing employment and income for the masses, the state will have to take care of the really poor in more direct fashion, including providing subsidised food, shelter, basic education and healthcare.

Let us see how Mr Jaswant Singh has tackled these concerns, and what the chances of success are. He hopes to boost consumption demand by giving income-tax relief to all taxpayers. The standard deduction has been raised for all, and the income-tax surcharge removed. Dividend tax for shareholders has been abolished. All these should put more disposable income in the hands of the public which, presumably, will increase consumer spending.

The lowering of excise taxes should reduce the prices of a variety of consumer articles (including consumer durables) and boost demand for such products. Even the reduction in interest rates on PPF, small saving and bank deposits may reduce savings and increase current consumption. This effect, may, however, go the other way. For target savers (those who save to have a fixed steady income flow in future) the incentive would be to save more and consume less today.

The Finance Minister proposes to increase investment expenditure, mainly on infrastructure and health projects, through private-public cooperation. There is not much scope for increasing public investment expenditure, given the precarious state of the public exchequer.

Capital expenditure by the Central Government, which used to be 25 per cent of total expenditure in 1990-91, has fallen to just 15 per cent now. The Government can, at best, be a facilitator by putting in place the right policy and regulatory framework.

The Finance Minister has allocated only Rs 2,000 crore per year towards the highly ambitious Rs 60,000-crore additional spending on development of roads, railways, airports and seaports. However desirable these projects may be, it remains to be seen whether the private sector will be enthused to invest so much money in infrastructure projects, given the problems of project implementation and realisation of remunerative user fees.

How about the inflation rate? Under the prevailing excess capacity and the high degree of competition in most sectors (in particular, cars and other consumer durables) where excise taxes are being reduced, the producers are likely to pass on the benefits of tax cuts to consumers. Already, there are signs of that happening. The only negative impact on the price front may come from the hike in petrol and diesel prices to finance infrastructure projects announced in the Budget.

The Finance Minister has announced that the supply of foodgrains at specially subsidised prices to people below poverty line (BPL) will be extended to another 50 lakh families. Given the bulging foodstocks (despite the drought) in FCI godowns, this can and should be done.

In the area of social security, Mr Jaswant Singh announced one new health insurance scheme to be operated through public sector insurance companies. For the premium of a rupee a day, a person can get a hospitalisation cover up to Rs 30,000 per annum, plus Rs 25,000 cover for accidental death.

For BPL families, the government will pay Rs100 per year towards the annual premium. The benefits may mean a lot for the really poor, though for such people the administrative hassles of buying insurance, getting reimbursement with proper documentation and possible corruption by unscrupulous health-care providers may remain major obstacles.

The Finance Minister has also announced a 9 per cent guaranteed return (subject to a maximum of Rs 2,000 per month) pension fund to be operated through LIC. This, again, is an attempt to provide a small cushion to senior citizens in the face of steadily declining interest rates.

How about the prospects for job creation? Given the near-bankrupt Central and State governments, one cannot expect new job creation in the government sector. If anything, the emphasis is on reducing the number of government employees through income-tax exemption on VRS money (up to Rs 5 lakh) and not filling up vacancies on retirement.

If the proposed infrastructure projects pick up, then that should create jobs in construction, steel, cement and related areas directly, and in other areas indirectly, through `the multiplier effect'. If the Budget can give a boost to even the luxury sectors, such as cars, air-conditioners, and so on, by reducing prices and increasing demand, workers would benefit through additional jobs in such industries and their ancillaries.

The substantial reduction in import duties and increased depreciation allowances on medical equipment, and the new medical insurance scheme should provide a shot in the arm to the private health care industry, which again should create additional jobs. The restoration of LTC to government employees should provide a boost to the labour-intensive tourism industry. In other words, employment creation has to come primarily from higher growth in the private sector.

The abolition of the dividend tax would benefit the secondary stock market. But that does not mean that the primary market will be rejuvenated. Whether investment in additional capacity creation (by new stock issues) would take place depends on expected demand.

Growth, or more accurately expected growth in demand, holds the key here. By forcing a reduction in interest rates on savings and abolishing dividend tax, the Finance Minister may be trying to lure small investors to the stock market. But it is highly doubtful whether they will return to stock market. They are not going to forget their losses from share market scams and the UTI debacle.

Finally, the Budget deficit picture. The biggest worry is the rising revenue deficit, not so much the fiscal deficit. A revenue deficit means that the government is borrowing money to finance its current consumption expenditure. It does not generate any assets that will yield a return to finance the future debt servicing cost.

The revenue deficit came down from 3.3 per cent of GDP in 1990-01 to 2.4 per cent in 1996-97 but now stands at 4.3 per cent in 2002-03.

The Finance Minister has projected that this will be 4.1 per cent in 2003-04. But it is likely to be significantly higher as the budgetary expenditure figures for the coming year have not provided for a number of commitments.

These include the Government bridging the gap between the 9 per cent guaranteed return to pensioners and the actual return earned by LIC, providing the subsidy for the universal health insurance plan, compensating the States for the shortfall in revenue due to introduction of VAT and the debt swap schemes for the States which may save around Rs 80,000 crore for the states at the Centre's expense.

(The author is Professor of Economics, Indian Institute of Management Calcutta.)

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