The politics of good budgets

One hopes that the improvement in governance that Manmohan Singh brought about from 1991 to 1996 in the finance ministry, in banks, and so on, would now be replicated throughout the Central government. This could have a measurable impact on the welfare of the poor. On the economic front, growth has slowed during the last five years to 5.6 per cent per annum from 6.7 per cent per annum in the previous five years. This has both a trend component and a cyclical component. The underlying growth trend in the manufacturing, agriculture and mining sectors has been downward for the past seven years. Consequently, GDP growth has also been on a downtrend, contrary to the conventional wisdom prevailing in 2003-4. There is an urgent need to reverse this, if the CMP objective of sustained 7 to 8 per cent growth and employment for all is to be realised. The cyclical component, driven in the last three years by rainfall variations, contributed to the poor performance.

The 8 per cent growth rate last year represented mostly a monsoon-led recovery of agriculture from the very poor rainfall of 2002-3. There are clearer signs of a cyclical recovery in 2004. A recovery in domestic investment, which has been low in the past three years, is presaged by the sustained higher growth rate of capital goods production. The cyclical recovery in industry needs to be sustained and strengthened. Both these require reforms that will improve the environment for investment and the generation of productive jobs, thus stimulating higher productivity growth. The forthcoming budget is likely to make a start in addressing these issues.

In our view the following reforms will fulfil the objectives and constraints discussed above: one, reduce the peak tariff rate to 15 per cent and above peak rates to 60 per cent. A department of revenue committee had recommended limiting above peak rates to twice (three times for liquor) the ‘peak rate’. Alternatively, announce that the peak rate will go down to 10 per cent by ’06-’07 and a uniform 5 per cent import duty will come into being by ’08-’09, thus converting India’s tariff rates from the highest in the world to the lowest. A study by the Indian Council for Research on International Economic Relations has estimated the positive impact on exports and productivity.

Two, make the CENVAT (Central Value Added Tax) into a genuine central VAT, by including services within its ambit, eliminating all exemptions besides food, medical, education and tiny industry (Rs 10-20 lakh), and reducing the rate to 15 per cent. This is a better alternative to the service tax. Three, simplify the personal income tax by eliminating all exemptions (80L, 88, etc.), having one rate for the standard deduction and sharply raising income levels at which the 20 per cent and 30 per cent rates become applicable. This should be tax neutral for the average tax payer, make tax filing and payment easier, reduce tax evasion and increase revenues over time.

Phasing out SSI reservation over the next year or so, the the fourth point. Agriculture deserves special attention because its growth rate has declined sharply to 2.1 per cent per year during 1998-9 to 2003-4 compared to 3.6 per cent per annum in the previous five years. Repeated droughts in some rain fed areas have been particularly harsh on those dependent on agriculture. A large proportion of the poor reside in rural areas. Reform of agriculture and the food economy requires action by Central and state governments. Which bring us to the fifth intervention: the need to introduce a food debit/credit card that entitles the poor to obtain food rations from any registered shop at specified rates. This would have to be supplemented by food stamps in areas where credit card systems have not reached and by cooperative channels of distribution in remote areas where the PDS is non-existent.

Six, repeal the Essential Commodity Act and replace it with an act that can be used only in an emergency in a specified area for a limited duration. Seven, introduce a unified food act and a single food regulator to deal with all food regulations. Eight, reform of the agriculture research system to make it more autonomous (free of bureaucratic interference) and accountable for research (peer review of defined output) and dissemination. There is the need to encourage private-public partnership in the interest of the farmer.

The removal of ceiling restrictions on FDI (in telecom, banks, insurance, retail trade, real estate development) that is exclusively directed either at the agriculture sector or at rural inhabitants/areas, is the ninth input that should be considered.

On the expenditure side, budget allocations for agriculture, irrigation, water, health and education sectors and employment (guarantee scheme) are likely to increase. Governance and social service delivery system reform will probably take shape over the next six to nine months.

The writer is director and chief executive, ICRIER