The budget should shed rhetoric and keep the government house in order

What needs to be done for that 7 per cent growth

Bhanoji Rao

At a recent meeting of Assocham, the finance minister made it plain that his government will not accede to requests to protect individual sectors. He exhorted the industries to become competitive in the face of the expected lowering of tariffs to ASEAN (Association of South East Asian Nations) levels. He stressed the need for infrastructure development, while expressing hope that a 7 per cent growth is still possible.

If one were to put the growth rate of 7 per cent and the need for infrastructure development to facilitate that growth, one must work with an incremental capital (that is, investment) to incremental output ratio of at least 4 per cent if not more.

Investment required out of current gross domestic product (GDP) would amount to at least 28 per cent and with our saving rate no more than 24 per cent of GDP (which could see a “healthy” fall if consumption were to pick up), we need to plug the investment gap of 4 per cent of GDP. Taking a conservative estimate for total current GDP at $600 billion, the investment gap that needs to be filled is $24 billion.

Taking this track and go on shouting that China is getting close to $50 billion as FDI (foreign direct investment) and we are only getting $3 or 4 billion and ask state chief ministers also to speak to potential investors etc., is all of little use. We simply do not have a strategy to get FDI of the right type from the right source, and whatever strategies our civil servants and ministers have thought out have not worked so far. The finance minister, the Planning Commission, divestment minister, ministers in-charge of various public enterprises — all must explain what they are up to with regard to raising resources. If not, we should be content with a 6 per cent growth, assuming all else remains constant.

All else will not remain constant unfortunately. If growth were to be consumption-driven (via expansion of consumer credit, for instance) to take care of capacity utilisation in the numerous relatively new and old consumer goods industries, the savings rate will fall below 24 per cent of GDP and growth rate will fall to less than 6 per cent. How much less will depend on a host of other parameters, such as the level of fiscal deficit, inflation expectations, the extent of diversion of saving to unproductive and speculative investments and so on.

What is the best course for the finance minister (FM) in the coming budget? It is time to reduce rhetoric for the media, lectures for industry, and goodies for vote banks. The FM could very well take the stand that for once he is setting the environment for growth and not dwelling on direct growth promotion policies. Thus, the budget should focus on keeping the government house in order. He should put in place, for instance, the following:

* An inflation target to be implemented by the Reserve Bank with all the attendant limitations on the fiscal deficit,
* Divestment and debt reduction targets that are realistic and can be realised (along with some reasonable projections of reduced revenue deficits and growing surpluses),
* Medium term expenditure reduction plans, including planned mergers and acquisitions of ministries (for example, dates for the closure of the divestment ministry, merger of commerce and industry ministries into one for trade and industry etc.
* A blueprint for civil service reform (including setting a proportion for technocrats and professionals to be hired into civil service) with the ultimate aim of raising productivity as well as introducing a performance- based pay system,
* Steps for the reform of the tax administration (including electronic filing of income tax returns by all except businesses),
* Immediate setting up of state-level special courts to deal with all economic offences, including tax evasion (this will lead to some reduction in case load on the normal courts),
* Announcing initiatives towards reforming the levels of punishment (we must find a way of punishing without imprisoning in order that we save resources spent on prisons and prisoners), and
n Declaration that all export-oriented industries (those that export half or more of total production) are off limits to union activity unless the union is an enterprise union with workers as office bearers, with no affiliation to any political party, and with union activity limited to matters such as productivity, training and wage negotiations. More can and should be added to the list and the FM should devote the first part of the budget speech to all these initiatives under the general heading of “putting our house in order”.
* Leave the budget with no major changes in taxes and expenditure in line with estimated revenue and fiscal deficit agreed to with RBI. The only change in taxation should be in regard to income tax: simplification of the tax base by eliminating all exemptions except life insurance premiums and provident fund and pension contributions; and extension of the range of services under presumptive as well as normal income taxation.

We in this county deserve and need a different budget. The FM can be assured that the 6 or 7 per cent growth rate will come on its own because he will be creating a refreshingly new environment for honest investment and hard work.

(The writer can be reached at bhanoji@vsnl.net)