We want an honest, simplified budget: panelists
New Delhi: In a discussion moderated by Mint editor R. Sukumar at Mint’s pre-budget event on 30 June, Bharatiya Janata Party (BJP) leader Seshadri Chari; director National Institute of Public Finance and Policy Rathin Roy; assistant professor at Jawaharlal Nehru University Himanshu, and associate professor at National Institute of Urban Affairs Debolina Kundu talk about what the government can do in this budget to revive growth and generate jobs. Edited excepts:
Sukumar: The macro context in which this budget is being presented could not be worse. Can you give us some perspective as to how bad it is and your outlook?
Roy: Things are seriously bad, but we have been in far worse crises before. This is not 1991, this is not 1980, this is not 1969.
In India, 5% growth is now disappointing because our aspirations are much higher.
So we need to worry about growth. I think there are three problems with growth.
We have a fiscal deficit which needs to be brought down, but the trouble with fiscal deficit is not its volume, unless you are worried about the rating agencies—it is the fact that the Central government today borrows to consume.
That means that the government has stopped investing in hard infrastructure. It spends too little on human development and education and health as compared to others, but what we spend we spend badly. The investment hasn’t brought about the results in terms of a better educated and healthier workforce, better sanitation, better outcomes.
But the good news is that the states don’t. Indian states, with three exceptions—Punjab, Kerala and West Bengal—don’t borrow to consume. They run surpluses on the current account.
Inflation is high, but the causes can be eminently tackled if the government and the Reserve Bank of India work together. I think it’s a good sign that the new government and the Reserve Bank are also addressing the causes underlying inflation.
Sukumar: What do you think, given the ideology of your party, this government will do?
Chari: The situation is very bad. You know, to arrive at a proper frame of situation you will have to see the situation from say 2004-2005 to what we have come to.
Along with our economy, we have a parallel subsidy economy which is practically shooting at all the parameters of the original economy.
Food inflation, fuel inflation and no capital formation. No capital-based industry in the last 10 years except automobile and that, too, in only two states: Tamil Nadu and Gujarat.
If you see the sectoral growth also, it’s very poor.
You can imagine the task that has been cut out for us. To add to that, this is an interim budget, this is going to run for six to eight months. Post six-eight months, say 2015, what is the kind of debt that we have to address?
The foreign debt, the private equity fund that has gone out of this country in these last 10 years... no big-ticket investment had come from outside and no big-ticket investment has been done by the industries in this country inside... it has all gone out. So, it is a huge task with a number of problems heading out from various directions.
This budget will have to face three very important tasks: the first is controlling inflation, second is providing employment and the third is industrial growth. And if we come to sectors, you’ll have to keep in mind three important sectors: agriculture, infrastructure, industry.
There is very little elbow space for the finance minister and within the given elbow space if he is able to manoeuvre and go ahead and make a way forward for the next budget.
Please do not expect too much of correction from this budget: this budget cannot correct the anomalies of the last 10 years.
For 8-9% growth we have to have a systemic progression of budgets beginning from this year to almost five-six years. So, this is going to be a beginning. All that we can expect is that this should be a good beginning.
Sukumar: What do you think will be the focus and emphasis of this budget?
Kundu: There will be a focus on provision of basic services for the urban poor, like pakka housing, dwelling unit, water supply, sanitation and electricity to each person living in urban areas.
There is also some talk going on about provision of urban amenities in the rural areas. So, if that happens, then a lot could be achieved, not only in terms of provision of basic services, but also in terms of employment generation.
Because if we look at towns and cities, we do not find there has been a high rate of growth in the last three decades; the rate of urbanization has come down.
Since 1981, there has been a sharp decline from 3.8% to a present 2.76% of rate of urban growth. And we have about 2,532 new census towns being added, which are actually under the rural governments.
So, in order to boost our economy, it’s not important to provide basic services for the existing towns, but some statutory form of governance needs to be brought to these rural centres.
Sukumar: What kind of investments will result in jobs?
Himanshu: In the last two decades, there has been a focused approach on creating infrastructure in urban areas, but most of it has gone to the bigger towns, the metropolitan areas in that sense. After 2005, the rural areas have benefited a lot based on whatever kind of transfers you call it or whatever entitlement-based subsidies.
The one sector which has missed out is the middle team which is basically, as you call it, the rurban, the small towns.
Most of the employment-intensive manufacturing industries are coming in those places, but those are the ones which have been completely overlooked.
I mean look at what’s happened to the structure of employment. The challenge is not just that you have to create the employment for the people that are coming into the workforce, which is roughly 10-12 million, but also for the people that are moving out of agriculture. Because of the heavy spending in the rural areas, they have benefited a lot not only in terms of monetary income growth but poverty has also declined.
People have moved out of poverty in a big way. Wages have gone up the fastest ever if you take a long-term period of six-seven years in real terms, and this has fuelled some kind of expectations, aspirations, so you have to provide employment to the people that are coming out of the rural areas, exiting agriculture.
The problem here is that people moving from agriculture went into construction sector and construction sector was going through a boom and therefore people were getting into it. But that has come to an end now. Construction cannot absorb any more employment.
It has to come from small and medium enterprises. It has to be given credit support.
These are the ones who can create jobs, in manufacturing and these are the ones which can create what the government has been talking about in that sense of the next level of manufacturing.
Sukumar: What are the three things that you would like to see the government do in this budget?
Himanshu: I would like the government, for at least in the longer four-five year period, to focus more on taking care of the small and medium enterprises between the small villages to the big towns. There has to be hand-holding of the manufacturing sector, particularly the small and medium enterprises.
Inflation is something that also has to be the focus of this government.
My third point is that rural areas still continue to be an important driver whether in terms of inflation or the people who are moving out of agriculture, or in terms of your biggest sector which is consuming your aspirations. They have to be taken care of, whether in terms of providing support in agriculture or in terms of employment creation or in various other ways that you can think of.
Chari: My three ideas are one, we need a simplified tax structure at all levels. There are a number of reports available within the government and all you have to do is, take some of the good points out of all these suggestions that have been made over a period of say, 20-25 years. Two, increase investment in agriculture, research and development and agro products. Instead of giving tax concessions to farmers, it is better to make investment in agro business. That will solve some of the problems that we are facing as of today. Three, make a huge investment and provide enough for education, human resource development, especially the skill development part of it. These three things this budget should tackle.
Kundu: What I would look for in this budget is, there should be some allocation for small towns, small and medium towns and for the rural areas. Till now, it has been very large city-centric.
The smart city concept which is coming up is a good thing, but then we need to see how we create them and take it forward because of a lot of investment.
We have a large demographic dividend coming up because our young population is increasing and one-third of the unemployed are graduates. So skill development and some sort of employment, maybe self employment should be a focus area.
In terms of disparities between urban and rural areas, I think rural areas are much worse off, so there should be some employment generation scheme in rural areas as well.
Roy: Smaller government, more governance. How will the budget reflect it? We want two things: we want an honest budget and we want a simplified budget. Let us simplify the tax system.
There is an instrument in the budget which has been ignored systematically over the last 10 years: the medium-term expenditure framework. It is an opportunity for this government to say what it intends to do in the next three years.
I need to see commitments in reducing Central government expenditure. I believe that the Central government should not be meddling in the business of healthcare and education. Give that responsibility to the states, acknowledge that the Central government will be smaller, let the states get a better devolution—they manage the office better, anyway.
Finally, in terms of the fiscal deficit, provide a plan over the next three years on how you are going to reduce the fiscal deficit by reducing the revenue deficit. When you look at the statement of revenues forgone, there is a staggering number of concessions and allowances that are there.
So, I think together with a streamlined tax administration and structure, people are willing to accept fewer concessions and fewer exemptions. There is real money there and the finance minister can make a beginning to that very very commendable journey in this budget.