The Hindu Business Line : Budget must focus on growth with equity

The major challenge before the Finance Minister is not only to initiate measures to sustain and accelerate the growth momentum of the economy but also to ensure that overall economic growth is accompanied by greater equity. To achieve this objective, the major emphasis of the Budget proposals will have to be on four focus areas: Agriculture and allied sectors, infrastructure, education and employment generation, says S. D. Naik.

The Finance Minister, Mr P. Chidambaram... A challenging time. — Rajeev Bhatt

THE Finance Minister, Mr P. Chidambaram, will be presenting the Budget for 2006-07 at a time when the economy is in good shape and this fiscal's GDP is projected to grow at a healthy 7.5-8 per cent. Manufacturing activity remains buoyant, well-supported by robust domestic and export demand, expanding bank credit, rising capacity utilisation, sustained corporate profitability and growing business confidence.

However, the major cause for worry at this juncture is the far-from-satisfactory performance of the farm sector; the agricultural growth rate has dropped to just 1.5 per cent during the first three years of the Tenth Plan (2002-05). The major challenge before the Finance Minister is not only to initiate measures to sustain and accelerate the growth momentum of the economy but also to ensure that it is accompanied by greater equity. To achieve this objective, the major emphasis of the Budget proposals will have to be on four focus areas: Agriculture and allied sectors, infrastructure, education and employment generation.

The declining capital formation in agriculture, from 1.9 per cent of GDP in the early 1990s to 1.3 per cent since 2000-01, has dragged down the sector's growth and prevented the economy from attaining its real growth potential. Largely because of the big decline in public investment, post-reform, the share of agriculture and allied activities in GDP has fallen steadily from 32.2 per cent in 1991 to just around 22 per cent now. However, this sector continues to provide employment to about 58 per cent of the country's labour force and sustains over two-thirds of the population.

Unfortunately, the non-farm sector has also not been able to siphon off the surplus labour from the farm sector despite the economy growing at a higher average rate of around 6 per cent in recent years. Nor is it likely to do so in the near future. Hence, there is a need to adopt a twin strategy of creating more employment opportunities within the agriculture sector as well as outside it, particularly in rural industries, including agro-processing industries. This is possible if farm sector growth, along with allied activities, is stepped up to at least four per cent per annum.

To add to Mr Chidambaram's predicament, he will be faced with the difficult task of adhering to the annual commitments set out in the Fiscal Responsibility and Budget Management Act and, at the same time, find additional resources for funding the new schemes. .

Resource mobilisation is a formidable task confronting the Finance Minister. Today, the food and fertiliser subsidies account for Rs 26,000 crore and Rs 16,000 crore respectively, and often do not reach the intended target groups. If the Finance Minister is able to cut these subsidies by 50 per cent, he can spare Rs 20,000 crore for the much-needed irrigation projects. Currently, the allocation for irrigation is grossly inadequate. According to Planning Commission sources, the cost of implementing the backlog of irrigation projects is around Rs 90,000 crore.

It is possible to raise more resources to fund irrigation and other projects, as also to create the much-needed rural infrastructure if only the Government can muster the political will to cut some of the non-merit subsidies and raise user charges for electricity and water to at least cover the cost of supplying these inputs to farmers. The Government's total subsidy bill — implicit and explicit — has bloated to over Rs 110,000 crore, or 20 per cent of its total revenues.

Then, there are glaring deficiencies and inadequacies in infrastructure sectors such as power, roads, ports, airports and railways; these have been widely discussed and debated over the past several years. However, the progress in implementing the projects continues to remain poor. While there is a mood of optimism about the economy entering a higher growth path, there is a real danger that the infrastructural constraints might hamper the growth process. Last year, the Prime Minister, Dr Manmohan Singh, had estimated the country's investment needs in core infrastructure such as roads, ports, airports, power and water at a minimum of $150 billion over the next 10 years. At the turn of the century, the Rakesh Mohan Committee on commercialisation of infrastructure development had estimated the funding requirements at $300 billion by 2015. .

While stating that investment in infrastructure would continue to be funded through the Budget, he had pointed out that many financially viable projects were facing difficulties in raising the required resources. Hence, he had proposed the creation of a special purpose vehicle (SPV) to fund such projects. However, the much-hyped SPV announced in the last Budget is yet to take off.

To raise resources on the scale required, efforts are needed to invite more private and foreign investment into this sector. In this context, the decision to involve the private sector in the modernistion of Mumbai and Delhi airports after a prolonged delay is a welcome small step. There are many other airports that need modernisation. And more new airports are needed to meet the growing demand of the aviation sector.

The country needs world-class infrastructure to enable the manufacturing sector to grow at a faster pace of at least 12 per cent per annum and to improve its competitive strength in world markets. Despite the recent pick-up in its growth to about 9 per cent per annum, it still accounts for just 17 per cent of GDP. Our aim should be to increase this contribution to around 25-30 per cent over the next 10 years. For growth in manufacturing is the key to generating more employment to absorb the growing low-skilled labour force.

Also, with the economy entering a higher growth path, providing a thrust to primary and higher education has assumed increased importance . Despite the considerable progress made over the year, the prevalence of illiteracy in the country is still unacceptably high, at 35 per cent, according to the 2001 census. The state of secondary education, particularly in rural areas, is no better. The standard of education is particularly poor in Government and municipal high schools. As for higher education, it is seen that except a few centres of excellence such as the IITs, IIMs and a few universities, the rest of the colleges and universities are just graduate-producing factories. Those coming out of these institutions often lack even basic knowledge and skills. The reform of higher education in the country is long overdue.

Of late, knowledge-based industries such as automobiles, pharma, electronics and services such as information technology, research and development have made great strides. If the country is to maintain the growth momentum and lead in the skilled labour-intensive services, there is an urgent need to focus on the quality of higher education.

Two areas that require special attention are small and medium enterprises (SMEs) and labour law reforms, both to provide the much-needed boost to the manufacturing sector and generate employment opportunities. The reservation of a large number of items exclusively for the SSI sector has outlived its utility after liberalisation of imports. In the last two Budgets, some items were taken off the reservation list. Even so, 506 items still remain. It is time to de-reserve all the items and instead provide more financial and other incentives to the sector to facilitate its modernisation and healthy growth.

It needs to be emphasised that the employment guarantee scheme launched by the Government can, at best, be a short-term measure and not a substitute for reversing the ongoing trend of jobless growth. Serious efforts are needed to generate more employment opportunities, particularly in the rural areas.

As Prof Hanumantha Rao has rightly pointed out, if only the agricultural output had grown at a minimum rate of four per cent per annum, as targeted by successive Plans, together with large-scale diversification of agriculture, rural employment growth would have been sufficient to absorb the bulk of the growing labour force and there would have been no need for the Employment Guarantee Scheme.