The Finance Minister Mr. P Chidambaram would have prepared the final draft of Budget 2008 that he will be presenting on February 29, 2008. With an eye on the elections, what remains to be seen is that whether this will be an UPA budget aimed at appeasing the masses or the front has the confidence of proposing a budget for the long term sustainable growth of India. The INR 30,000 crores of debt waivers for the small and marginal farmers (refer to my previous article for the ills of such a policy) would indicate that getting re-elected is a top priority and not what is best for India.
The major issues that need to be immediately addressed by the budget are as under:
1- Inclusive Growth: It is the need of the hour that the benefits of a high growth rate generate more jobs. The current growth rate of jobs is 2.25% as against the desired level of 3.5% that is essential to reduce the unemployment backlog and for that to happen the Farm Labor needs to migrate to labor intensive sectors such as textile, food processing, retail, manufacturing, etc. The government needs to encourage FDIs in these sectors. Also, the government needs to give tax breaks to industries that employ labor intensive techniques rather than capital intensive techniques.
2- Agricultural Reforms: The largest employer of India contributes only 2.3% of the total GDP. This does not augur well for the sustainable growth of the economy at the rate of 8% - 10% in the long run. There has been negligible improvement in the irrigation facilities and the current state of infrastructure is appalling. The Finance Ministry needs to treat agriculture as an industry and pass on all the fiscal benefits that will act as a catalyst in increasing productivity. The marginal land holding needs to be consolidated and leased to farmer cooperatives. The acceleration of the creation of cold chain infrastructure will also be a shot in the arm for the agriculture sector. Perhaps Mr. Sharad Pawar needs to exhibit some dynamic leadership in the agricultural ministry that has been associated with him as far as the BCCI is concerned.
3- Fiscal Deficit: The government has been impounding on the public sector bank funds to finance its budget deficit. Nearly 46% of the Public Sector Bank funds are utilized for the said purpose. This hurts the interests of other sectors of the economy such as the manufacturing sector that depend on the Public Sector Bank for its resources. To discourage this, the Finance Ministry must look at privatizing the banks.
4- Tax Rebates: The debt accumulated by the centre is almost 86% of the GDP. This does not augur well for the economy and has potential of leading the country into a crisis situation. The Finance ministry may look westwards, especially at the US and imitate some of the fiscal policies adopted by it. Maybe tax rebates will act as an injection to the economy and will encourage the all important middle class of India to save more. Also, this will encourage them to use the extra money to increase expenditure that will be good for the economy in the long run.
5- Universalize the Integrated Child Development Scheme (ICDS) with quality: Children are the future of a country. A cliché that makes a lot of economic sense. The economy suffers a 2% - 3% loss to GDP due to the presence of malnourished children. Therefore the government should make it a top priority to universalize the ICSD. To universalize the ICSD means setting up of more than 1.4 million Anganwadi centres, amongst other measures that would ensure that 80 million children gets benefited. The Supreme Court order on December 13, 2006 to set up 1.4 million Anganwadi centre by December 2008 and the fact that the current UPA government had committed to the same in its National Common Minimum Program should ensure that it finds a place in the budget. This will require an investment approximately INR 33000 crores or 0.5% of the GDP. One can only assume that despite the political compulsions that takes away almost 98% of the Budget for Defense, subsidies, etc, the Finance Ministry has segregated 0.5% of the budget for ICDS keeping the Supreme Court directive in mind.
6- Not to succumb to self serving industrial agenda: When the Finance Ministry succumbed to Ratan Tata’s agenda of stopping the iron ore exports ‘at all costs’ and imposed an export tax on iron ore, it set a dangerous precedent that could push the economy backwards. Such a gullible tendency of the ministry will encourage other industries to lobby for similar steps that will serve their own interest. The fact is that currently the iron ore manufactured in India is far more that the demand for it. The export tax will burden the mining industry and will result in lower revenues and loss of jobs. Also, it will act as a disincentive to others who plan to invest in the natural resources. The fact is that such a policy may come back to haunt the Tatas (who make steel using the iron ore) as what stops industries such as automobile industries, consumer durables and construction industries from asking for a similar restrictions on the steel industry?
It is time for the Finance ministry to maintain a balance between political and economic compulsions. The Bollywood Badshah - Shahrukh Khan said in an NDTV wards function, “The politicians should be as honest as practically possible” in Mr. P Chidambram’s presence. Maybe that meassage would have sunk in!
This entry was posted on Wednesday, February 27th, 2008 (I migrated from blog.co.in)
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