The Hindu Business Line : Budget's rural focus can stimulate India Inc

Fiscal 2006-07 might be remembered as the year of fiscal prudence and financial rectitude. The year in which the revenue-side of the Government's accounts surged and expenditure was under leash. But more importantly, as the year in which the Finance Minister, Mr P. Chidambaram, refused to indulge in the usual rhetoric and appease India Inc.

It was a business-as-usual Budget, carrying forward the policy initiatives of earlier years. Mr Chidambaram emphasised in his Budget speech that the country's tax rates and other financial indicators were fast aligning with those of the East Asian and global economies. What he left unsaid was that as India integrates with the global economy, Corporate India cannot expect the annual dollops, largesse and tax cuts in successive Budgets.

Focus changes

The Government seems to be adhering to the maxim `it is not the business of the government to be in business'. Other than minor tinkering with the rates, the Government has begun to pay greater attention to infrastructure, agriculture, education and rural development.

And on this count, 2006-07 is more likely to go down in the country's economic history as one in which linkages between rural and urban India began to yield results. The belated transition is quite evident in nuggets of information in the Budget. Much effort and time has been spent on bringing about financial inclusion of large segments of the rural population. In 2005-06, the Budget had fixed farm credit at Rs 1,05,000 crore, a 30 per cent growth over the previous year. That target was not only achieved but surpassed.

Public sector and regional rural banks added 58.20-lakh new farmers to their portfolio of borrowers. Targeting over 30 per cent growth, the Budget set Rs 1,75,000 crore for 2006-07. The target, according to Mr Chidambaram , will not only be exceeded comfortably but is likely to touch Rs 1,90,000 crore . By December 2006 an additional 53.37-lakh new farmers were brought into the institutional credit system. Against this, the 2007-08 target, at Rs 2,25,000 crore, is extremely modest bringing an additional 50-lakh new farmers into the banking system — just 18 per cent growth over last year.

Credit for turnaround

But credit for this major turnaround should not go to the Government alone. The changes were inevitable in an economy in transition. The impact of economic development was beginning to percolate to rural India as well. The demand for credit from corporate India had plunged and banks were left holding a lot of cash. Retail credit had become the engine of growth. But still, there was excess liquidity with banks, which began to focus on the rural and farm sectors. In pursuit of building good rural assets, access to farm credit was made more liberal and borrower-friendly.

Given the on-going build-up of infrastructure and irrigation facilities in select rural pockets, farm loans are no longer an anathema to the banking industry. The sharply lower rates and liberal lending guidelines have begun to give the unorganised moneylenders a run for their money. The growth might be significant, but the numbers are still a dot on the vast fabric of rural India. The changing perception towards rural India is evident in the extension of micro-credit and priority sector advances.

There can be no doubt that the earlier supply-push growth intervention schemes are giving way to a demand-led growth across some parts of rural India. The huge amount of time and resources extended to schemes such as Bharat Nirman, National Rural Employment Guarantee Scheme and Sarva Shiksha Abhiyan are the most likely stimulants for the emergence of this demand-led growth impulses, which can be far more easily be sustained without external intervention.

Though Corporate India might still be peeved by Budget 2007, it can take heart at the growth stimulus emanating from rural India. This will sooner or later translate into new demand for industrial goods and services, and provide the biggest stimulus for the Indian growth story to continue.

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