The Hindu Business Line : Budget: A welcome paradigm shift

Torn between inflation disturbances and its inevitable political fallout, the Finance Minister has chosen, rightly, to move away from the traditional corporate-friendly postures and focus on hitherto less emphasised areas such as agriculture, infrastructure and social sector. Now, the key is delivery, say D. SAMBANDHAN and M. RAMACHANDRAN.

The budgetary exercise conducted by the Finance Minister every year is not merely an income and expenditure statement but essentially symbolises the economic and social policies of the government.

Since the days of Manmohan Singh's economic reforms, launched in the early 1990s, the mystery element of the Budget has been vastly disappearing and successive exercises, cutting across the political parties, have concentrated largely on corporate/urban-centric concerns to the neglect of agriculture, infrastructure and social sectors.

As is well known, the essence of Dr Singh's Fiscal Revolution through the 1990s and thereafter has been to shift the subject matter of Budget, placing inflation containment and Balance of Payment/fiscal correction at the centre of the Budget exercise. To the credit of the reform package, the external sector is the best and the brightest, fiscal deficit has been pruned to the desirable limit and inflation, until recently, was quite benign, exerting a beneficial effect on interest rate level.

Even the recent resurgence of inflation cannot be fully attributed to monetary factors, but is mainly supply-side driven and, hence, could be a short-term phenomenon. In any case, an economy that is on a high growth trajectory has to learn to live with inflation, at a level little more than what is considered to be the threshold.

Supply constraints

More than a decade and half's experiment with Budget-making in an environment of economic reform and globalisation underlines one very important — higher growth is an essential precondition for fiscal consolidation, alleviation of poverty and maintenance of high level of employment.

Despite higher growth induced revenue buoyancy, lower fiscal deficit and so on, a variety of cumulative deficiencies in the agriculture sector have eventually created a series of supply constraints which have pushed up the prices of many agricultural wage goods. The result: Resurgence of inflationary pressures and rising inequities among the people and across the regions, becoming a matter of concern for the Finance Minster to negotiate.

In the context of Indian economy, it is tempting to compare agriculture, infrastructure and social sectors to the liver (as the famous statement of D. H. Robertson, comparing the monetary system to the liver that is noticed only when it fails to function) and it is gratifying to note that authorities have recognised, even if belatedly, their significance in not only making the reforms work but also tame inflation.

Farm failure

To understand and appreciate the Finance Minister's concern over inflationary pressures largely triggered by agricultural failure and poor supply management, a revisit on the final years of Tenth Plan period with regard to performance of agriculture and allied sector is required. With monsoon playing truant in 2002, 2004 and 2006 and declining public investment in agriculture including the failure of farm extension service, farm production, especially in non-foodgrains category such as pulses and oilseeds, declined.

The advance estimates for 2006-07 showed that the overall growth was 9.2 per cent while that of the agriculture and allied sector was 2.7 per cent. Though the primary sector contributes only one-fifth of GDP, two-thirds of the population is still dependent on it; hence, any gross failure threatens the growth of other sectors by dampening potential demand. Furthermore, experience suggests that in addition to monetary expansion, a rise in the general price level can also be traced to poor growth in the primary sector. Without undertaking effective and timely supply management, authorities have always compounded the chaos.

Political pressures

Torn between inflation disturbances and its inevitable political fallout the Finance Minister has chosen, rightly, to shy away from his traditional corporate-friendly postures and focused on hitherto less emphasised areas such as agriculture, infrastructure and social sector. Thus, he seems to have taken to the strategy of a big push strategy bottom-up so that a rejuvenated agriculture economy can serve as an instrument of augmenting aggregate demand that would help sustain economic growth.

This further means that the focus of Finance Minister is not just higher growth but on the structure and composition of growth tilted in favour of those areas which will help produce wage goods indigenously and thus arrest inflationary forces in the medium term. However, the success of this strategy is conditional upon increased outlays getting translated into the desired outcomes.

Humane commitment

Though there is nothing in the Budget which would please the corporate sector and middle-class, there is more than a symbolic gesture beyond the nothingness or a non-event as some would call it.

It must be underlined that these neglected sectors cannot be kept in cold storage for too long as a large and growing infrastructure deficit is fraught with dangerous consequences when the growth rate is likely to surge.

However, given the resource constraint and the political compulsions, it has become quite inevitable for Finance Ministers to allocate relatively more towards health, education and family welfare, though the allocation of funds for crucial economic infrastructure has been falling short of the requirements stipulated in the Eleventh Plan targets.

It is clear from the data that unless there is increasing participation by pension funds and insurance sector or some private sector majors through Foreign Direct Investments, in the foreseeable future the infrastructure deficit will prove to be a severe constraint on growth and that will complicate the inflation-growth dynamics in the medium to long term.

Pragmatism

This is not the first time a Finance Minister has remembered the neglected sectors. Often, whenever there is political debacle, rulers do remember their commitment to the `Old India' symbolised by the rural folk. For example, when Mr P. Chidambaram was Finance Minister in 1996, he was wedded to `a firm and pragmatic commitment to high growth; a humane and heartfelt commitment to social justice and alleviation of poverty; fiscal prudence and austerity'.

Ten years down the line the same Finance Minister laments over the failure of the government's commitments. We can add here that diverse coalition partners must reconcile the differences while enlarging the areas of consensus and subsidy should be strictly for the `really needy and the poor'. Let us hope that ten years hence, the Finance Minister should not find himself in the awkward situation of repeating the same slogan.

(The authors are, respectively, Professor and Head, Department of Politics and International studies, and, Professor, Department of Economics, Pondicherry University.)