A story of missing reforms

A story of missing reforms
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First Published: Thu, Mar 01 2007. 01 26 AM IST
Updated: Thu, Mar 01 2007. 01 26 AM IST
The Budget speech reminded me of the eighties, when finance ministers were quite desperate to convince people that small expenditures on irrigation schemes, milch cattle in backward districts, school buildings, village health workers, et al, was the way forward and that garibi would thereby go away. Well, it hasn’t. And here’s a Budget trying to say that age-old remedies may do the trick this time. Greater Gross Budgetary Support to the Plan as a panacea for all problems!
The good news first. The FM has largely restrained himself from meddling with the growth story. The near 19% hike in plan allocations is substantive and outlays have been raised for agriculture, education and health. The attempt at convergence among all preventive and curative health programmes at the district levels will mean more efficient and effective use of resources. One can see the PM’s hand in the well-thought-out focus on secondary education. The initiatives for encouraging private management for ITIs, and the focus on institutions for skill upgradation draw on recommendations of the National Manufacturing Competitiveness Council.
Peak rates of customs duties are down to 10% as expected—not quite Asean levels, but almost there. No change in Cenvat, with only a little sectoral tinkering that is the right of every FM. Export taxes on iron ore and chrome will let primary commodities be used for value addition at home. The two-tier duty on cement is a clever move, and the extension of the service tax net was expected. There is little change in direct taxes, though the hike in the dividend distribution tax and some classes of mutual funds, as well as MAT on IT companies would dampen spirits a wee bit, but then, all exemptions could have gone, instead.
The FM must be complimented for checking expenditure, carefully selecting areas for investment, yet not yielding to populist schemes, or at best, making small allocations for these. The scheme for the unorganized sector, where the states are expected to contribute part of the premium, is one such. Sounds nice, but would take off only in some states.
Then why am I unhappy? Because even in the sectors that did merit attention, there’s no new initiative. If rural credit is doubled while output remains the same, then rural indebtedness per head will rise! In agriculture, there are no new thoughts—bringing back the T&V (training and visit) system is going back three decades in extension, when media outreach is available with ease. In health, the NFHS-3 (National Family Health Survey) points to declining coverage of immunization—more money is no answer. The Plan schemes are the same as a decade ago. Performance is lagging far behind allocations, the figures tell us.
Infrastructure allocations are up very marginally. The FM admits to constraints in project formulation for national highway development. Road construction is officially down to 0.26 km per day, and has fallen over the last two years. Nothing on airports and ports. Part of the inflation is due to poor infrastructure, but there is little to accelerate implementation.
The promised reforms in direct and indirect taxes have been skipped. There was much talk about cleaning up exemptions—that hasn’t happened. There is little relief for the small taxpayer. Tax distortions, such as J&K and R&D in pharma, continue.
There is very little to deal with inflation. The ban on rice and wheat futures as well as setting up a panel to look at forward trading in commodities reflect the panic caused by a lack of understanding of this market and an urge to control. It is a retrograde step and could block a big opportunity. We need mature regulatory practices, not knee-jerk reactions.
Tax-tinkering continues. Cross-country gas pipelines have infrastructure status—easy to see where that comes from. The exemption from tax on venture capital for select sectors—biotech, nanotech etc., is another attempt to play God with markets. A marginal change in income-tax exemption levels—unlikely to satisfy anyone. Cash withdrawal tax continues, but the limits are raised. Exemptions to small industry up slightly. And so on.
For the first time, there is an attempt to leverage the Forex reserves with RBI. The Infrastructure Finance Corporation is to set up an offshore subsidiary entity that would borrow from RBI and lend to corporates for their acquisitions overseas, for capital expenditures, and as an additional source of external commercial borrowing. Forex, essentially public money held in trust, would be available for private investments. The argument is that returns to RBI would increase. But who would bear default risk—RBI can’t, would the government be responsible for non-performance? One has to wait for RBI’s reaction to this rather unusual proposal. The attempt to use the National Small Savings Fund (states don’t want it now due to high interest costs), for infrastructure would mean costlier lending for this.
Strong fundamentals in the economy could have been used for envisioning boldly: one expected cuts in customs duties, and in excise rates to 14% or less, and rationalization of taxes. Incentives to the automobile and other manufacturing sectors could have been provided. And in agriculture, implementation of some of M.S. Swaminathan’s suggestions that have been gathering dust for a year. A pity that none of this happened. The word ‘reforms’ is missing in the entire Budget.
S .Narayan is a former finance secretary and economic advisor to the Prime Minister of India. Your comments are welcome at policytrack@livemint.com
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First Published: Thu, Mar 01 2007. 01 26 AM IST
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