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Suresh Krishnamurthy

The thrust of the Economic Survey is encouraging for investors. If the Budget even partially reflects its priorities, that would be a positive for the economy.

AS INVESTORS and salary-earners wait for the Budget with trepidation, the pronouncements in the Economic Survey can only warm their hearts. There are no prescriptions for an aggressive tax-and-spend policy. There are also other favourable observations, and no disappointing recommendations.

Finance Ministers have in the past ignored either totally or partially the Survey's prescriptions.

The Budget could, in the end, increase the incidence of taxation for the salaried class. It would, however, be far worse if the Budget also proved inflationary and expanded the Budget deficit. If the Finance Minister, Mr P. Chidambaram, adheres to the tenets set out in the Survey, that would not happen.

The Survey raises hopes for a Budget that would encourage growth without pinching too much the pockets of the investor and the salaried class.

Stable interest rates: The Survey makes a case for fiscal consolidation (reducing deficits without harming development objectives), suggesting that only such reforms can help keep interest rates stable. The Survey says that interest rates need to stay low for a number of years if the cost of government debt is to come down.

In the section on Banking, the Survey also exhorts banks to fine-tune their project finance skills, as Government borrowing is likely to decline because of fiscal consolidation. In another section, the Survey has talked about the positive impact of low interest rates. The signs, therefore, are unmistakable. The writers of the Survey prefer low interest rates.

If the Finance Minister is also thinking on similar lines then it is reasonable to infer that the hike in the Employees Provident Fund rate was an aberration. Administered interest rates can be expected to stay firm.

Tax reforms: The emphasis on fiscal consolidation and preference for low interest rates also suggests that market borrowings of the Government would not rise sharply. So, will the Government make up for it by raising taxes?

The Survey points out another way — prioritisation of expenditure and rationalisation of subsidies.

The Survey also says that the availability of resources alone cannot guarantee social sector development. Its purport: We may not need initiatives such as the education cess to finance social sector expenditure.

The Survey, however, plumps for tax reforms. This would principally involve lower indirect taxes and a substantially reformed system of direct taxes.

Such a reformed system would, however, be bad news for the investor and salaried class. For instance, proceeds received on redemption of tax-saving investments could be taxed. This would be balanced by lower tax rates. The optimistic expectation is that the changes would be neutral to the salaried class. For investors, the securities transaction tax could rise.

Favour investors: A tight leash on fiscal deficit, low interest rates and tax reforms are, on the whole, positives for industrial growth. And rapid industrial growth is, in turn, a positive for investors in the capital market.

It is also positive for the salaried class, in two ways:

First, the emphasis on fiscal deficit reduction will in a way apply the brakes on inflation. Restrained Government borrowing will strengthen the rupee which, too, would restrain inflation.

Second, the salaried class can expect compensation packages to grow at a reasonably higher rate, especially following three years of bumper profits. But if the Government takes its eyes off deficit and market borrowings, then a `tax-and-spend' policy could fuel inflation. Industry would then be reluctant to increase salaries.

The Survey has, in addition, talked about the need for:

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