Chidambaram shows his spirit is willing

The Finance Minister also seems determined to rein in inflation to around 5 per cent and, more importantly, keep the fiscal deficit in check.

In fact, as a result of the runaway government spending and mounting deficit, the pressure on interest rates has begun to tell. The Survey clearly indicated that interest rates could rise.

Otherwise, it was evident that Chidambaram had inherited a sound economy. Agriculture grew by 9.1 per cent—but that was largely because it had shrunk the previous year—while industry and services expanded by 6.9 and 8.4 per cent respectively. Still unable to keep the politics out of the economics, the Survey refused to give the NDA Government credit for any of this. Instead, the growth was attibuted to a ‘‘benign world economic environment’’.

If the Survey reflected the Finance Minister’s thinking, his Budget tomorrow should take the first steps towards overhauling the tax system, cutting out tax exemptions and systematically slashing the deficit.

Speaking disapprovingly of indisciplined spending by the states and the Centre, the Survey pointed out that, at 10 per cent of GDP, deficits had reached crisis levels. As the global prices of oil hardened, the pressure on the economy could mean ‘‘interest rates moving northwards’’.

With a 10 per cent industrial growth on its wishlist, the Survey said that some constraints needed to be addressed. These included removing reservation for small-scale industries, high customs tariff, rigidity in labour laws, reaping economies of scale, friction in creation and closure of firms and distortions in indirect tax structure. The Survey says that the government will stick to the April 1, 2005 deadline for states to move to the value-added tax system. It will also seek private investment in infrastructure.

Left to himself, Chidambaram has indicated he would favour an open FDI policy. At $119 billion, the foreign exchange reserves give him the cushion to speed up trade reforms. But whether he will be be able to translate his agenda into Budget proposals tomorrow could depend on coalition politics as well as sound economics.

Symptom

• Economy grew at 8.2 percent

• Agriculture grew at 9.1%, industry by 6.9%, services by 8.4 %

• Inflation rate was 5.5 %, despite pressure from high oil prices

• Forex reserves rose to $ 119.3 billion

• Combined Centre-State fiscal deficit dipped to 10.1 %

• Foodgrain production up to 210.8 million tonnes from 174.2 million tonnes in previous year

• Subsidy bill up 10 times since 1991-92 to Rs 48, 636 crore

• 414 lakh Kisan Credit cards issued, up from 6.1 lakh in 1999

Diagnosis

• Sustaining GDP growth at 7 to 8 percent

• Restricting inflation rate to 5 percent

• Pushing agriculture growth through diversification and agro processing

• Industry growth at 10 per cent plus to push employment

• Control fiscal deficit — cutting government expenses and increasing revenue

Prescription

• Increased FDI and FII inflows

• Public-Private partnership to be stepped up, may lead to more incentives to private sector for investment

• A new Minimum Support Price policy, where cost-plus formula favouring inefficient agri practices could get a hard look

• A more open market for foodgrain exports

• A flexible rupee vs dollar rate

• Scrapping reservation for small scale manufacturing