Indians
have been so deeply conditioned by decades of the command
economy that they still cannot get used to the idea
that the best budget is one that changes nothing at
all.
So
it is hardly surprising that his budget for 2007-8 has
drawn a host of criticism not for what it has
done but for all the things that it has not done.
The
criticism is far from being justified. Much of it is
in any case politically motivated. The Congress has
just lost three state elections. This has sent adrenaline
coursing through the veins of the opposition, which
is consequently spoiling for as fight. But a large number
of special interest groups, which have, literally never
had it so good, had been lulled by Mr. Chidambaram''
unfailing courtesy into believing that he was going
to make things even better for them. These have not
hesitated to voice their disappointment.
The
truth is that the current budget is very similar to
the one Mr Chidambaram presented last year, and for
very much the same two reasons (See: ). The first
is his conviction that when an economy is already doing
well one should tinker with it as little as possible.
The second is that from the start Mr Chidambaram
had made it his goal to remove the distortions introduced
into the taxation system during decades of the command
economy, and turn it back into an instrument solely
for raising revenues for the government.
It is difficult to find fault with his approach. The
economy is set grow at more than nine percent a year
for the second year in a row. The rate of growth of
manufacturing has climbed from 8.7 per cent in 2004-5
to 11.3 per cent in 2006-7. Mr. Chidambaram has therefore
confined his tax proposals to streamlining the existing
tax structure, bringing customs duties closer to South
East Asian rates. Instead, he has concentrated upon
the expenditure side of the budget, where he has tried
to remedying perceived weaknesses in some sectors of
the economy.
Among
the more important initiatives are a sharp increase
in the supply of credit to agriculture; the revival
of the agricultural extension service that used to be
the backbone of the green revolution; the creation of
a training corps that will instruct farmers in adopting
better conservation practices, and of an elaborate system
for recharging ground water reservoirs by draining rain
water into open wells.
Mr.
Chidambaram has frankly admitted that investment in
the infrastructure has not only fallen catastrophically,
but that attempts to increase it through public-private
partnership, have made a slow start. The solution he
intends to try out in the coming two years is to create
a large shelf of investment projects and put them all
up for competitive bidding.
In
the meantime he has finally taken up the suggestion
first made by deputy chairman of the planning commission
Montek Singh Ahluwalia, to use a part of India''s foreign
exchange reserves to buy the imported component of infrastructure
projects. That will give the government an additional
source of funds to invest in the infrastructure on its
own.
There
is, similarly, a welcome emphasis on not just education,
but on providing the right type of education.This is
reflected in the government''s determination to complete
the modernisation of the country''s 1500-plus Industrial
Training Institutes. There is also a belated but nonetheless
extremely welcome recognition that the government needs
to stop treating education solely as an entitlement
and start treating it as a privilege to be conferred
on the deserving. That is what the hundred thousand
merit-based scholarships a year that Mr. Chidambaram
has announced will do. This will go a long way towards
redressing the imbalances that had crept into education.
Concentrating
upon the expenditure side does not mean that Mr. Chidambaram
is playing safe. What it means is that he has now got
the tax regime very close to where he wants it. This
is apparent from the spectacular success of the Value
Added Tax. Resisted for years by the state governments,
it has proved such a fruitful a source of revenue that
the states have not only implemented it but agreed to
phase out the central sales tax, to which they had clung
so adamantly for the past decade and a half.
Between
the decline in the interest charged on state government
debt, the rise in the yield of their taxes caused by
the switch to the VAT, various debt write-offs and spending
economies, there has been a sea change in the finances
of a majority of the state governments during the past
three years. One wishes that Mr. Chidambaram had devoted
more time to telling the Lok Sabha just how great this
change has been and what it signifies for the future
of the country.
Mr.
Chidambaram''s budget does, however suffer from one shortcoming.
It has been framed at a time when sections of the economy
are overheating and others are suffering from fairly
acute cost-push inflation. The Reserve Bank has been
bearing down almost brutally on the money supply to
curb the former. This has pushed up real interest rates
to levels, of seven to eight percent for good borrowers,
that the economy last knew seven years ago. There is
a real danger that this will cause the present investment
boom to peter out a few months hence. That could trigger,
once again, the kind of recession the economy experienced
in 1995.
However
much one may want it not to be so, a budget will always
remain to some extent an instrument of policy. Mr. Chidambaram
needed to take the country into his confidence and tell
it just how he intended to tackle the inflation without
impairing the economy''s spectacular growth. But he barely
made a reference to inflation and had nothing to say
about how he would tackle it without hurting growth.
He would reassure the public and foreign and Indian
investors greatly if he were to do this during the budget
debate.
*
The author, a noted analyst and commentator, is a former
editor of the Hindustan Times,
The Economic Times and The Financial Express,
and a former information adviser to the prime minister
of India. He is the author of several books including,
The Perilous Road to the Market: The Political
Economy of Reform in Russia, India and China, and
Kashmir 1947: The Origins of a Dispute, and
a regular columnist with several leading publications.
(The
author''s articles can be read at www.premshankarjha.com)