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| Making sense of Budget 2004: (L-R) Crisil's
Subir Gokarn, former professor of Delhi School of Economics
S. Tendulkar, NIPFP's Indira Rajaraman, BITE moderator Jairam
Ramesh, Deputy Chairman of Planning Commission Montak Singh
Ahluwalia, India Today's Prabhu Chawla, UTI's M. Damodaran,
RGICS's Bibek Debroy, Tata Group's S. Roy, and Kirit Parikh,
Member, Planning Commission (not visible in the photograph) |
Budget
2004 failed to enthuse the six economists who make up the Board
of India Today Economists (BITE). At its fifth meeting, held just
two days after Finance Minister P. Chidambaram placed his Budget,
BITE members were hard-pressed to find anything to excite them or
the economy in what was billed by him as the "human face of
reforms". "Possibly some fresh paint on the old human
face," comments Indira Rajaraman, RBI professor at the National
Institute of Public Finance and Policy (NIPFP). "It's just
the packaging that's different," quips Siddhartha Roy, chief
economist at the Tata Group.
BITE, comprising six economists (besides Rajaraman
and Roy, there's Subir Gokarn, Suresh Tendulkar, Bibek Debroy, and
Kirit Parikh), meets every quarter to analyse trends in the economy
and assess the impact of policy. The last meeting was especially
significant because it came shortly after Chidambaram's new budget
and also because the chief guest at the meeting was Montek Singh
Ahluwalia, the recently appointed deputy chairman of the Planning
Commission.
Yet the mood was bleak with most panelists of
the view that Budget 2004 had really done nothing to spur fresh
investments or even generate employment. And although most of them
agreed that there wasn't much in the Finance Minister's proposals
to take economic growth to a higher plane, they did think achieving
a sustained 7-8 per cent growth in the long term seemed feasible.
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WHAT THEY SAID
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| "We
have been through more than 10 years of reformed environment
but have been unable to translate that into the kind of employment
growth that we need to generate"
"The inability of banks to lend
against anything other than the balance sheet and hard assets
reduces the potential flow of funds to start-ups"
Subir Gokarn,
Chief Economist, CRISIL
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"There are certain things that
this
Budget ought not to have done that I think will hinder growth
and one of them is the hike in the service sector tax rate
from 8 to 10 per cent"
"How have we demonstrated that
the rate of service sector taxation,
which should be integrated with goods, be 10 per cent and
not something else?"
Bibek Debroy,
Director, Rajiv Gandhi Institute of Contemporary Research
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Delivery Snafus
Even the renewed focus on agriculture and rural
infrastructure, through massive investments, failed to enthuse the
panelists who felt in the absence of a proper delivery system, such
huge allocations would not reach the real beneficiaries and be wasted.
Says Gokarn, chief economist at credit rating agency CRISIL: "It
is easy to make a judgement that money is simply not going to deliver
on the promise.''
Even Ahluwalia seemed to concede. His new focus,
he said, would be on enabling the delivery mechanism to make funds
directly available to the district or village panchayats by bypassing
the state government, prompting BITE moderator and Congress' Rajya
Sabha mp Jairam Ramesh to call it "from pm to dm minus cm."
A few proposals got the approval of the BITE
members. Rajaraman sees merit in the Food for Work programme in
150 selected backward districts, the enhanced allocation for Scheduled
Castes and Scheduled Tribes and the emphasis on restoration of water
bodies. "We need to increase irrigation acreage and we need
a cropping mix depending on irrigation needs of areas," she
says. Likewise, she and her co-members also gave the thumbs up to
the food stamp scheme.
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"I think that the urban Indian saver
is not even looking so much at tax rates or tax incentives
or interest rates anymore but at the security of their savings"
"Whenever we think of tax incentives
or reducing custom duties, we do have to remember the need
for public revenue, for public expenditure on infrastructure"
"The Food for Work programme recognises
the concentration of poor in a particular backward region
and the need for such programmes in these areas"
Indira Rajaraman,
RBI Professor, National Institute of Public Finance and
Policy
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"I do believe
that a really credible and an effective intervention that can
stimulate agricultural growth can stimulate the economy as a
whole"
"The emphasis on irrigation and restoring water bodies
was long overdue. It can be extremely productive in a short
span of time"
"The Food for Work programme is a self-adjusting, self-targeting
programme that is especially useful in a bad year"
Kirit Parikh,
Member, Planning Commission
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BITE also felt that the Indian industry had
responded well to the global economy and to the various reform initiatives
over the years. But what worried it was the decline in private investment
by at least 3 per cent of GDP between 1996 and 2003. Budget 2004,
the economists felt, did little to help reverse that trend. Increasing
private investment is a pre-requisite for generation of employment
and given the fact that the UPA has an avowed intention of creating
more jobs, this is of vital importance. Says Gokarn: "The direct
link of reforms percolating to the masses is through employment
and the budget does not do anything to accelerate the process of
employment generation."
Kick-starting Growth
Suresh Tendulkar, former professor at the Delhi
School of Economics, feels that achieving 7 to 8 per cent growth
rate is paramount for employment generation, but achieving that
growth with out a 10 per cent industrial growth is trifle unattainable.
"Where is that 10 per cent industrial growth going to come
from?" he ask. Even after huge investments are made in agriculture,
the growth rate would only climb to 4 to 4.5 per cent. And given
the fact that agriculture comprises just one third of total GDP,
it is not enough to achieve 7 to 8 per cent growth rate unless special
emphasis was paid to industry.
Kirit Parikh, who's recently appointed member,
Planning Commission, is less critical and offers the classic inter-sectoral
linkage According to him, emphasis on irrigation and restoration
of water bodies could increase agricultural purchasing power and,
in turn, increase demand for industrial goods, thereby, driving
industrial investment. "I do believe that a really credible
and an effective intervention can stimulate agricultural growth
and, therefore, the economy; I think some steps have been taken
that are correct here and it has the possibility of giving fairly
quick results," says Parikh.
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"Somebody
needs to do a study to see whether growth in tax collection
has actually increased because of value-added tax and inform
the group that is working on VAT"
"There are certain things, for
example, import of capital equipments, that could have been
allowed at a lower rate to fuel investments"
"Introducing VAT could be slightly
tricky because there is no universal definition of manufacturing"
Siddhartha Roy,
Chief Economist, Tata Group
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"To achieve
an overall 7 to 8 per cent growth, we need something like a
10 per cent growth in industry, but I don't see where this growth
is going to come from"
"Low productivity of employment is a much greater problem
in this country than open unemployment"
"Although the repackaging has been done in terms of
greater emphasis on health and education, there is nothing
that I see in terms of achieving 7 to 8 per cent growth"
Suresh Tendulkar,
Former Professor, Delhi School of Economics
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BITE members feel the raising of FDI limits
in telecom, insurance, and civil aviation, much lauded by India
Inc. as a bold initiative, are really no change for the trend. Gokarn,
in fact, says the enhanced limits may not see any significant increase
in absolute numbers but lead to realignments in shareholding patterns
of telecom companies.
The finance minister's commitment to implement
vat by April next year was a move that is welcomed by Roy of the
Tata group, who thinks this will reduce transaction costs within
the economy. But Debroy, Director, Rajiv Gandhi Institute of Contemporary
Studies, however, voices his disappointment over the non-implementation
of Kelkar task force recommendations. "The thrust of the Kelkar
task force has been to eliminate exemptions. Had that happened I
would have given Chidambaram 10 out of 10," says Debroy.
The panelists also seem to be unanimous on
the issue that tax incentive schemes have virtually no impact upon
savings rate of India, which has been stagnating at 23 to 24 per
cent for many years. Rajaraman of NIPFP is categorical that it was
not so much as tax rates or tax incentives that were of concern
for the urban middle class, but the security of their savings. The
collapse of the UTI and of other mutual funds in recent years has
been a shock from which the Indian saver is yet to recover.
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