Budget must sidestep the soft options

First and foremost, the need to withstand pressures for new, populist schemes. Those already committed constitute fiscal and implementational strains. Adding to the woes of implementing agencies would be wasteful. Not surprisingly, audit reports on some flagship schemes like NREGP have been less than favourable, suggesting inadequate preparatory work. Blaming state governments for poor governance does not help.

District officials, the same agency who are already engaged in law and order and numerous development schemes, have neither the time nor capability to undertake added commitments. Innovative alternative agencies are not easy to secure; we are best served to consolidate and optimise outcomes from ongoing projects.

Second, this budget would be presented in the backdrop of the National Development Council8217;s recent adoption of the XIth Five Year Plan. It will also be the budget for the second year of the plan. Clearly, the priorities contained in the plan need to be suitably reflected. This goes beyond provisioning for a hefty increase in the Gross Budgetary Support and settling inter-sectoral outlay priorities. It also entails a major increase for education, going up from 7.6 per cent of central GBS to 19 per cent. The implementation of the agriculture plan approved by the special NDC based on regional and state-specific characteristics including restructuring of the accelerated irrigation benefit programme and making National Rainfed Authority, the National Food Security Mission and the Rashtriya Krishi Vikas Yojana will be a priority.

Third, the need to ensure that the tax structure remains stable. On personal income tax, the exemption threshold can be somewhat adjusted and inflation indexed over time. Income tax rates have stood the test of time and remain modest by international comparisons. Consistency in rates have improved compliance and made individual tax planning easier. The revenue buoyancy, however, offers scope to do away with surcharges and abstain from clever tinkering. On corporate taxes, given the need for progressivity, while basic rates may remain untouched, many irrational aberrations of the last two years deserve elimination. On indirect taxes, given the rapid appreciation of the rupee, care must be exercised in further lowering of tariff rates in the near term. On excise, we must move towards implementing the GST and abstain from ad hoc exemptions or create new rates. It is not rational to calibrate rates to address cyclical concerns. The proportionality of the revenue realised from the petroleum sector, which remain unacceptably high, need rationalisation over a period. However, calibrating rates to shield the consumer from the burden arising from high crude prices is not the way forward.

Fourth, the prime minister, while addressing the National Development Council, had raised serious concerns on subsidy misuse, growing regional inequalities and rising income divides. Credit and fiscal policies have a role to play to redress these concerns. Development-deficit states have a comparative factor advantage in one area or the other.

Vocational training and skill inculcation in demographically dense states can help. Besides encouraging agro-processing, value-added activity will have multiplier gains. Central public utilities, subject to commercial viability, can also be encouraged to invest in the more backward states. The issue of subsidy misuse is a broader but compelling issue. Targeting of subsidies to the intended beneficiaries needs 8216;out of the box8217; thinking and ideas like food stamps, kerosene stamps, and employment stamps, based on verified household data, need wider replication.

Fifth, while outlay on education will rise substantially and the devil always lies in the detail, it is doubtful if, in the absence of a credible implementation and enabling policy changes, much can be achieved. I have earlier written in this column, and the recent concern of the National Knowledge Commission reinforces this, that education needs policy reforms as much, if not more, than enhanced outlays. The absence of an enabling framework discourages private investment. There is little evidence that policy makers on HRD are ready for these mindset changes.

Finally, infrastructure and a fillip to the sagging manufacturing sector. Short-term fiscal changes serve little purpose but policy changes that can expand and accelerate competitive infrastructure facilities remain a priority. Based on experience, making public private partnership more attractive and workable is a challenge. There are other areas where implementational impetus and rigorous monitoring with accountability are inescapable. Political interference and rent-seeking has stymied progress in several areas and institutional fire-walling must be attempted.

Finance Minister P. Chidambaram has, on more occasion than one, hinted that the final year of this government will remain reform friendly. The budget is one occasion to prove this. It is also, perhaps, his last opportunity to redeem his reputation not only as a reform visionary but for shouldering the risk of implementing ideas in which he believes but others do not. Leadership is never about grasping the soft options.