P Chidambaram’s final Budget as finance minister of this government is a mixed bag of a few good things, a few bad things and one terrible idea. But its single biggest failing is that it has no long-term vision.
The new Economic Survey that was released on Thursday pointed out in no uncertain terms that the new challenge for India is to maintain economic growth near current levels. Few countries have been able to grow at around the double-digit mark for more than a decade. India has reached this range because of the cumulative effects of 15 years of economic reforms, when taxes were cut and regulations were eased. A large part of that job is done. Economic and fiscal policy needs a fresh turn.
The challenge today is to maintain the growth momentum. India faces a new set of challenges now that can hold back growth in the future: poor infrastructure, a shortage of skilled labour and insipid growth in agriculture, for example. Budget 2008 fails to address most of these issues. The only possible exception is as far as the skills shortage goes. There has been an attempt to spend more on education, as well as specific initiatives to increase the number of Indian Institutes of Technology, fund centres of higher education and set up a no-profit skills development corporation.
The biggest disappointment is what has been done in agriculture. India’s farm economy has been hobbling because of a long investment drought and low productivity. The finance minister has gone down the wrong path here, though there is reason to believe that he was unwillingly pushed by political compulsions.
The Rs60,000 crore waiver of farm loans could be a political magic wand—and economic dynamite. If that sort of money had to be spent this year, we would have preferred it being used to build rural roads, irrigation networks, cold chains and other elements that could revive the rural economy.
The entire world is struggling with high food prices and it is very likely that they will continue to be a problem for many more years. Supply shortages loom. Chidambaram could have focused on a package that has a positive effect on farm output and put a lid on domestic food prices in the future. The loan waiver will have no such effect. It is yet another example of strategic myopia that has led the finance minister to lose sight of long-term challenges and snatch quick popularity.
There have been a few welcome things in the Budget as well. The increase in income-tax exemption limits seems to be pegged to the inflation of the past few years. Good idea. There was not much of a case to cut either corporate taxes or peak customs duties, given the high overall fiscal deficit and the strong rupee, respectively. Most of the tinkering with rates is unexceptionable. The exemptions from the fringe benefit tax are welcome, though it would have been a better idea to completely scrap what is a dreadful levy. And the pilot project to use smart cards to distribute food in one state and one Union territory is an important start.
A four-year economic boom and buoyant tax revenues should have left the government with far better finances than now. The official deficit number is a huge underestimate, since it does not take off-budget bonds into account. Worse, the revenue deficit is not falling fast enough. By now, India should not have had any revenue deficit at all. That it does means that the government continues to borrow to finance its day-to-day expenditure. This borrowing will have to be repaid by future generations.
It’s a manifestation of the same problem—today’s compromises getting preferred over tomorrow’s opportunities. That’s why Budget 2008 is predictable in its overall composition: an election Budget in what could be an election year.
Have political pressures got the better of economic logic in Budget 2008? Write to us at firstname.lastname@example.org