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S. Sethuraman

The Finance Minister, Mr Jaswant Singh's first Budget will be keenly awaited for reviving the economy. Though he has set before himself multiple objectives which could be conflicting, it is likely that he would attempt to make the Budget truly growth-oriented, which is pro-poor, promotes savings and stimulates investment and generates a new climate of confidence and stability, says S. Sethuraman

INDIA enters 2003 with subdued optimism with regard to enhanced economic growth, which is contingent on a set of strong policy measures being politically acceptable in a year of State elections, the outcome of which may well determine the pattern for general elections in 2004. The two critical years ahead for the polity may not be conducive for radicalism. And, in this period, India has also to manage its economy amid global uncertainty. The world economy, far from recovering in 2002, is likely to remain sluggish for the best part of 2003 with current expectations of a strong rebound only in 2004.

Security considerations will remain paramount in a world shaken after the September11 attacks. India and Pakistan were on the brink of a nuclear collision in 2002, and despite troop pullouts on both sides, the border remains tense and there is no cessation of cross-border terrorism in Jammu and Kashmir. The general slowdown of the global economy and security threats, which affect trade and capital flows and oil prices, cloud the short-term outlook for India and many other developing countries in Asia. India's `resilience' has been much talked about, and if it has withstood external shocks it is only because of its relatively low level of global integration. After a decade's effort at enticing foreign direct investment, the country has not been able to attract more than $3 billion in any year, way below the wished-for annual flow of $10 billion. And the country is still stuck with the 0.6 per cent share of world trade and seems some distance away in achieving the 1 per cent level. Certainly, the first phase of liberalisation and structural reforms, successfully accomplished in the first half of the l990s, helped India graduate into an emerging economy to be reckoned with in the Asian region.

Talking big and doing little may not be a weakness exclusive to India. But the Prime Minister, Mr Atal Bihari Vajpayee, at the National Development Council, bemoaned the fact that little headway had been made with regard to overall reforms — something he has repeatedly said over the past years in several fora. There has never been any serious attempt to reflect on what went wrong in governance over the past five years to draw appropriate lessons for the future. The National Development Council's "unanimous" endorsement of the Tenth Plan does not automatically promise its fulfilment, and it would be beyond the Government, particularly with many contending forces within, to take the harsh measures that Mr Vajpayee listed in his address to the NDC. The setting up of task forces must, therefore, result in recommendations which are feasible and implementable in the shortest possible time. Even if things go well, the Tenth Plan may not yield dividends until the beginning of the fourth year, which will be the time for a mid-term review.

India needs 8-10 per cent growth for at least the next two decades to make a dent on poverty and backwardness, and there can be no disputing the goals set by the Planning Commission. The country has the potential to grow faster but only, as conceded by the Prime Minister, "if we remove many constraints and hurdles in agriculture, industry and services." These have been identified in a number of reports, the latest being the one by the Gonvindarajan Committee on project investment and implementation procedures. The malady lies in a lack of follow-up in implementation.

The Tenth Plan has not had a flying start, with the first year ending with 5-5.5 per cent GDP growth after two consecutive years of lacklustre growth at 4.7 per cent on an average and an erosion of the revenue base. This has heightened the concerns over the burgeoning fiscal deficit and the undiminished dependence on borrowings and external capital unmatched by productive investments. The alarming condition of State finances has prompted some of the Chief Ministers to question the resource assumptions of the Plan.

The Finance Minister, Mr Jaswant Singh, whose first Budget will be keenly awaited for reviving the economy, has been stressing on "simplification of tax structure and uniform rates", distancing himself from many of the original Kelkar Committee proposals on taxing agricultural and the near total withdrawal of all exemptions on savings and incentives for the housing sector. He has been emphatic on making the tax administration more efficient and effective, modernising the collection machinery and removing, as far as possible, interface between citizens and tax officials.

Mr Jaswant Singh's fiscal policy cannot overlook the broader political context and recent experiences — several of the 2002-03 Budget proposals being either rolled back or modified is just but one. The Finance Minister has reiterated that he wants to provide food to the needy and put more money into housewives' purses. He recognises the need to revive demand in the economy, by increasing the spending power of the citizens. It is the lack of demand that has held up private investments and prolonged the industrial slowdown. Mr Jaswant Singh has set before himself multiple objectives, which could be conflicting. There are limits to levying fresh taxes for mobilising additional resource, as this could, as in the past, hurt savings and investments.

For the second year of the Plan, the outlay has to be stepped up substantially. But what would be looked for is a major increase in public investment in infrastructure which, in turn, would generate private investments. Yet, Mr Jawant Singh has to see that the fiscal deficit is kept within limits, say, not more than 5 per cent of GDP.

A roadmap for the Budget could come from the Mid-year Review released in December. And the inputs from the now modified Kelkar proposals and a paper on subsidies under preparation, indicating correctives which would make them reach the targeted sections. Mr Jaswant Singh expects both the Centre and the States to get additional resources from value added tax (VAT), which is to come into force on April 1, 2003. The States have been assured that the Centre would make good the losses they might incur from the introduction of VAT.

Two areas highlighted in the Mid-year Review are the importance of disinvestment, not only as a Plan resource but also as a mechanism for restructuring of public enterprises to make them more efficient and competitive, and downsizing of government. Although the Cabinet has apparently broken the deadlock over the manner of privatisation of the two oil majors, the devil is in the detail. Even if the Disinvestment Ministry gets a freer hand in carrying forward the process, there will be continuing uncertainty on the proceeds from strategic sales or public issues for budgetary purposes. The Plan has assumed not less than Rs16,000 crore a year from this source.

Downsizing of government or labour market reforms will be met with political resistance and, as in the case of subsidy reductions, the Government will be cautious, as the ruling party is keen on capturing power in more States and wining 300 seats in the next Lok Sabha elections.

It is likely that Mr Jaswant Singh would attempt to make his first Budget a truly growth-oriented one, which is pro-poor, promotes savings and stimulates investment through a judicious mix of the available options in both direct and indirect taxation and generates a new climate of confidence and stability. The inflation outlook remains favourable and the comfortable foreign exchange reserves should help absorb a oil price shock in the event of a flare-up in Iraq. The international community sets great store by India's growth record in a democratic framework.

(The author is a former Chief News Editor of PTI.)

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