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T. C. A. Ramanujam

Though the Finance Minister, Mr Jaswant Singh, is new to the job, he has shown great finesse. Also, he has done his best to make the Budget process as transparent as possible. What development strategy will the Finance Minister follow in the preparation of the Budget this year? asks T. C. A. Ramanujam.

THERE is rising expectation about the Budget to be presented at the end of the month. Though the Finance Minister, Mr Jaswant Singh, is new to the job, he has shown great finesse in the past few months; the way he accelerated the enactment of laws in the financial sector. He has spurned customary platforms adorned by his predecessors in pre-Budget meetings of the captains of industry in Delhi. At the same time, he has done his best to make the Budget process as transparent as possible. What development strategy will the Finance Minister follow in the preparation of the Budget this year?

Gone are the days when capital accumulation was considered key to the creation of wealth. Even the Keynesian theory supported the high-income-savings-investment-nexus in the Theory of Capital accumulation. The debate about trade off between developmental growth and income inequalities continues to this day even after the path-breaking work of Lewis (1954) and Simon Kuznets.

It was the development experience of the East Asian countries that proved that poverty reduction could be achieved with higher growth. For that to happen, we need economic growth of labour-intensive character.

Gunnar Myrdal and Schultz established a positive correlation between equal distribution of income and economic development. "The productivity of higher consumption levels", said Myrdal "stands for me as a major motivation for the direction of development policy in underdeveloped countries. Higher consumption levels are a condition for a more rapid and stable growth."

Arguing that equality is a condition of economic growth, Myrdal explained how conspicuous consumption of the rich reduced the investment from higher income of the land-owning and industrial classes in the developing countries. Simultaneously, malnutrition and lack of elementary health and education reduced the productivity of the masses. The focus has now shifted to human capital as vital for economic growth. "Poor people in low-income countries," said Schultz, "are not prisoners of an iron clad poverty equilibrium that economy is unable to break" (The Economics of being Poor, 1993).

Again, in the words of J. K. Galbraith, "Poverty is man's most powerful and massive affliction. It is the progenitor of much further pain from hunger and disease on to civil conflicts. It is by universal education literacy and employment that individuals gain access to the world outside the culture of poverty and its controlling equilibrium.

Economic development consists in enlarging the opportunity to escape the equilibrium of poverty and culture." It is now widely recognised that success in elimination of human poverty depends on the pattern of economic growth and on the nature and content of public policy.

Employment opportunities

How did it happen that the East Asian countries — Malaysia, Indonesia and Korea — achieved spectacular success in reducing poverty? One common feature of development in these countries was the government's financing of basic social services and the high percentage of government funding of primary education, health, sanitation and infrastructure. Sri Lanka is an example of a country which reduced poverty substantially through fulfilment of basic needs.

Human and social development will have to be taken as a necessary factor for promoting growth in the framing of the Budget. The choice of policy is of crucial importance.

Expenditure policies must focus on schemes that will generate employment opportunities. It is an observed fact of life in India that the vast change in the composition of income is not reflected in the composition of people employed in the sources of income. Agriculture contributes just 25 per cent of GDP, but still accounts for two-thirds of the households dependent on agriculture for livelihood. In the past two decades, the shift from agriculture to non-agricultural activities in the labour force was just a little over 8 per cent. Lack of education and absence of technical skills accounted for the languishing of the vast mass of the labour force in under-employment and casual employment in rural India.

According to the Report of the Task Force of the Panning Commission on Employment Opportunities (June 2001), there has been an increase in the rate of unemployment between 1993 and 2000.

Even the employment generated in the rural economy provided only low incomes not sufficient to cross the poverty line. In the past decade, the economy's employment elasticity declined from 0.53 per cent to 0.15 per cent.

Employment elasticity in agriculture was either zero or a negative figure. Thanks to technological modernisation and industrial restructuring, the same may be true of the manufacturing sector also. Special programmes launched in the past five years, such as the Employment Assurance Programme, Swarna Jayanthi Gram Swarojgar Yojana, and the Jawahar Gram Samridhi Yojana have all had limited impact and, in fact, there has been a decline in the number of families assisted by the Integrated Rural Development Programme (IRDP). Part A of the Finance Minister's speech will be heard with keen interest to see how he seeks to achieve the developmental goals.

Resource mobilisation

The capacity for financing expenditure on the social sector depends a great deal on reduction of non-Plan expenditure and the raising of adequate resources for the Plan and not for the mere running of the administrative behemoth. India's tax-GDP ratio is the lowest among the notable countries of the world (Table).

Tax rate reduction since 1996 did not result in appreciation in tax collections. Even the total implementation of the Kelkar proposals will not guarantee a significant improvement in the tax-GDP ratio.

Instead of concentrating on the existing sources of revenue, the Government should explore avenues for mobilisation of revenues from hitherto untapped sources.

The Government is introducing Constitutional amendments to confer dual citizenship on people of Indian origin in seven countries. It has been estimated that the net fiscal loss to India from immigration to the US in 2001 was anywhere between 0.24 per cent and 0.58 per cent of India's GDP.

Income of NRIs in the US stands at 10 per cent of our national income. Prof Jagadish Bhagawati suggests the adoption of the American system of taxation based on citizenship rather than residence as we practice today.

This type of a Bhagawati tax could yield an annual revenue stream of about $500 million. This is an obligation based on citizenship and is not to be confused with remittance flows and NRI deposits.

Compared to China, the remittances of NRIs to India is only a trickle. It is necessary that serious attention be paid to modify the tax system and emulate the US for levying tax on the basis of citizenship. It cannot be that we will follow the US only for lower tax rates and exemption for dividend from taxes.

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