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Sinha must focus on long-term growth
Rahul Bajaj
FEBRUARY 22: The Union budget 2000-01 will be presented in the backdrop of apeculiar economic situation. On the one hand, the economy has begun torecover from the slowdown it had witnessed over the last two years, while onthe other, the state of the central exchequer is extremely fragile and couldvery well dampen the growth prospects of the economy.Several challenges lie before the finance minister when he presents thebudget on February 29th. The time for soft options is over. The Government would need to design a fiscal policy that would address thesevere constraints to the exchequer this year and the next, while outliningan agenda for credible fiscal consolidation and growth over the next 10years. The budget has to be structured as a document that not only setstough fiscal targets for the short term, but also gives a clear economic andfiscal blueprint for India for the first decade of the new century. Unless the country grows at a minimum of 7.5 per cent per annum for the next20 years there is no hope of dramatically reducing the extent of masspoverty and economic deprivation. At 7 per cent growth, the country willtake over three decades to catch up with Thailand; at 8 per cent it willtake 26 years; and at 9 per cent it will still take about 22 years.Therefore, it has become imperative that the Government formulates asustainable long-term growth-oriented budget. Among the initiatives which the Centre would need to take include: Significantly higher and sustained investment in infrastructure: Thisnot only involves physical infrastructure such as electricity,telecommunications, roads, railways and ports, but also socialinfrastructure such as primary, secondary and vocational education, primaryhealth, and supply of potable water and sanitation.There must be a consistent policy package to attract foreign directinvestment (FDI) in ports, airports, roads, power and telecom -- policies thatare transparent, that can be quickly implemented without going throughmultiple ministerial clearances, and where the rules of the game are notchanged every once in a while. In addition to this, the Government shouldclosely monitor public-sector investment in infrastructure to reducegestation lags. No Government can afford the quantum jumps needed for investment ininfrastructure unless it (i) steps up the savings rate, (ii) activelyencourages FDI, and (iii) generates significantly higher governmentresources through sustained privatisation. A programme of aggressive privatisation needs to be undertaken. Thereare two reasons for this. First, there is absolutely no reason why theGovernment must run enterprises in areas where market forces work. Second,this will have to be the key bridging element of non-tax revenue. Without asubstantial growth in privatisation proceeds, the Centre cannot have thefunds needed to amortise public debt resulting in reduced interest paymentsand, hence, last fiscal deficit and allocate greater social sectoroutlays. To be a powerful engine of growth, the corporate sector, banks andfinancial institutions have to go through a major restructuring in a fairlyshort period of time. Some of it has occurred owing to increased competition. Much of it has not,due to legal, procedural and political barriers to restructuring.Government must rapidly create a framework of law and procedures that removethese barriers and, thus, enable such restructuring. This can be done by repealing or amending outdated economiclegislation. India rarely ever repeals antiquated or incentive-incompatiblelaws. At present, SICA, the Companies Bill await amendment. Several otherpieces of legislative work needs to be carried out to facilitateprivatisation of ports, airports, transmission and distribution, andreducing the share of government equity in banks and public financialinstitutions to a minority.Deepen and strengthen financial-sector reforms. These would include issuessuch as reforming bankruptcy laws, amending the Recovery of Debts due toBanks and Financial Institutions Act, Banking Regulation Act among others soas to tackle the problem of NPAs. In addition to this, a thrust also needsto be given to venture capital funds as well. Government should focus on only those activities where market forces do notwork: primary education, primary health, supply of drinking water,sanitation, internal and external security, and maintenance of law, justice,and transparent rules of the game. Ensure fiscal discipline and consolidation. None of the above ispossible unless the fiscal deficit is contained. Deficits in the 5-6.5 percent range are not sustainable. They will increase public debt as well asthe monetised deficit, raise interest rates, increase future interestoutflows, crowd out private investments increase inflation and create anunsustainable fiscal situation. This needs to be achieved by cutting downnon-plan expenditure, reducing subsidies to the not so poor, enacting afiscal responsibility act which puts a ceiling on fiscal and revenuedeficits and adopting zero-based budgeting among others.These measures would go a long way in helping the economy reach a sustainedhigh-growth trajectory. Copyright © 2000 Indian Express Newspapers (Bombay) Ltd.
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