The Hindu Business Line : Rediscovering the priorities

With a plentiful supply of wage goods and a more than comfortable level of forex reserves, it should be possible to contain inflation. Hence, it is time the country outgrew the Budget deficit obsession and got on with development, says N. A. Mujum dar

THE tragedy of India's liberalisation process in the 1990s was that the policymakers began to follow IMF/World Bank recommendations, such as cutting down the fiscal deficit, eliminating all subsidies — including those for food, liberalising imports, evolving a market determined exchange rate and developing the capital market, blindly.

Intrinsically, there was nothing wrong with the recommendations, but what happened was that policymakers focussed only on these areas and ignored other pressing issues, such as poverty reduction, elimination of hunger, development of agriculture, employment generation — particularly in the rural areas, and improving the quality of life. The policymakers exulted in the GDP growth of more than 6 per cent in 1998-99 and 1999-2000. But this was jobless growth. With a view to reducing the food subsidy, the foodgrains prices distributed through fair price shops were raised, and also access to the public distribution system narrowed. The cumulative result of these policies was the more than 60 million tonnes of so-called surplus foodgrains. In a country which has the largest number of underfed and undernourished people, this mountain of foodgrains stands as a monument of its misconceived policies.

Hence, it was left to the Finance Minister, Mr Jaswant Singh, to rediscover the right priorities. "This Budget is about addressing the problem of poverty and lifetime concerns of our citizens, of giving a major boost to infrastructure and laying the foundations for balanced, accelerated growth of agriculture and industry, plus tax reform. I have tried to address the `Panch Priorities' and I hope that after this year of drought our economy will respond favourably to the Budget package and demonstrate impressive growth in 2003-04," he said.

The Finance Minister is aware that the Budget deficit rose to 5.9 per cent of GDP in 2002-03, well above the estimates. But there were extenuating circumstances. GDP growth declined to 4.4 per cent from 5.6 per cent largely due to a decline in agricultural growth by nearly 12 per cent. Fortunately, the industry witnessed a remarkable recovery and recorded a 6 per cent growth, and this is expected to further improve in 2003-04. Despite the anticipated robust growth, the Budget deficit will still be fairly high at 5.6 per cent of GDP. Despite fairly high levels of Budget deficits the last couple of years, it has been possible to contain inflation at well below 4 per cent. Has the conventional output-money-price relationship broken down after all? In any case, with plentiful supply of wage goods, mainly foodgrains, and a more than comfortable level of forex reserves, it should be possible to contain inflation. It is time we outgrew the Budget deficit obsession and got on with development. That seems to be the refrain of the Finance Minister whose speech went beyond the conventional arithmetic idioms.

Perhaps for the first time, a bold attempt has been made to attack poverty directly through the utilisation of surplus foodgrains. The Antyodaya Anna Yogana (a food-for-work programme) will be expanded to cover an additional 50 lakh families in 2003-04. Thus, more than a quarter of the families below the poverty line (BPL) will be covered in 2003-04. This involves an expenditure of Rs 507 crore. It may not be possible to substantially reduce poverty levels, but it is certainly possible to eliminate hunger immediately.

One hopes that the Finance Minister goes further and attacks hunger directly. For instance, he can institute a "grain loan facility" under which the Food Corporation of India (FCI) will provide foodgrains on loan to institutions such as the Khadi and Village Industries Commission (KIVC) and State village industries boards. The recipient institutions can generate additional employment in the decentralised sector, thereby enabling the rural unemployed to sustain themselves. In fact, 2003-04 can be devoted to fulfil the Finance Minister's assurance of "Garib Ke Pet Me Dana"'. In any case the re-ordering of priorities was indeed overdue.

Also relevant in this context are the whole range of programmes relating to infrastructure, agricultural and rural development. Many of these are labour-intensive and will go a long way towards employment expansion. Demand generated by enhanced public investments in infrastructure, the Finance Minister emphasises, has been a key stimulant for the current industrial recovery. It may be recalled that in October 1998, the Prime Minister launched the National Highway Development Project (NHDP), one of the most ambitious highway projects in the world providing strong backward linkages to steel and cement industries. The Budget for 2003-04 adds 48 new road projects at a cost of Rs 40,000 crore, with a total length of 10,000 km.

Again, there is the rural roads programme under the Pradhan Mantri Gram Sadak Yogana for which some Rs 2,325 crore has been allocated. In respect of agriculture, a new central sector scheme on hi tech horticulture and precision farming will be introduced this year.

In the area of rural credit, the most important development is the lowering of rural lending rates. All along the process of financial sector reforms, the rural sector was discriminated against. While a highly rated corporate entity could access bank credit at, say, 7-8 per cent, the small farmer continued to pay 12 per cent. The benefits of the low interest rate regime, thus, did not percolate to the rural sector. The State Bank of India has announced that its lending rates to agriculture and small-scale industries will be not higher than 2 per cent above its prime lending rate (PLR). Other public sector banks are expected to follow. Thus, farmers and small scale industrialists will now be able to access bank credit at rates no higher than 2 per cent above the rates charged to the bank's best customer. Further, the Finance Minister has exhorted the States to boost the micro-credit programmes, especially the Self-Help Group (SHG) commercial bank linked credit programmes. Thus, the access of the rural poor to bank credit will be enhanced and the cost of credit will be brought down.

Savings and personal income-tax

The Finance Minister should be congratulated for respecting many recommendations made by the Kelkar Committee on direct taxes. The recommendations relating to the abolition of tax concessions to small savings, housing loans, and to senior citizens have to be rejected. In respect of dividend income, the recommendation that dividends be exempted from tax at the hands of recipients has been accepted, but the tax on dividend distribution at the company level has been fixed at 12.5 per cent, rejecting the Kelkar task force recommendations.

The blow to small savings came in the form of a reduction of 1 percentage of interest payable on all small savings instruments, including the Public Provident Fund (PPF). This was the unkindest cut. The RBI followed this up by announcing an interest cut on savings accounts from 4 per cent to 3.5 per cent. In India, unlike in the developed countries, the household sector is the main contributor to overall financial savings, and any measure which acts as a disincentive to the household sector savings may jeopardise the overall savings rate.

One wonders whether there is a hidden agenda in discriminating against bank deposits and small savings, and for investment in equity. This fiscal discrimination exempts dividends from income-tax but taxes income from bank deposits. The interest rates policy also discriminates against bank deposits. The low interest rate regime has already brought down interest rates on bank deposits to the lowest levels. The reduction in rates on small savings was, perhaps, made in the expectation that an asset reallocation in favour of investment in equity will take place. This is again a totally misconceived concept.

The obsessive concern to develop the capital market is part of the IMF/World Bank theology. The efforts of the Government of India and the RBI to develop the capital market during the last 10-12 years by giving artificial props have failed. In the early 1990s, capital raised through new issues averaged some Rs 10,000 crore per year.

The expectation was that with the artificial props given to boost the market, this figure will rise to some Rs 50,000 crore during the late 1990s. Unfortunately, the reality turned out to be different. The annual average of capital raised was only Rs 7,000 crore in the last three years.

The policymakers should realise that in the India specific situation, bank deposits resources mobilised through small savings and through the capital market are all equally important. Hence, it is necessary to provide a level-playing field to the three sources of savings. There is no need to pamper the dividends incomes.

While on the subject of savings, it is also necessary to refer to gold imports. The Budget reduced the Customs duty on imported gold to Rs 100 per 10 grams from the present level of Rs 250. Why? In fact our basic approach to gold imports during the liberalisation phase defies all logic.

What purpose on earth can such massive imports of gold serve? Liberalisation is all right within limits but a resource-scarce country such as India cannot afford to spend such massive amounts on import of gold.

Surely WTO norms do not stipulate such unbridled liberalisation of gold imports. Even if one-half of the resources expended on gold imports are diverted to the capital market it will boost it. This is an aspect of savings which warrants re-thinking.

(The author is former Principal Adviser to the RBI.)

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