The first budget of a stable government should have a long term perspective. There is no need to be populist when the tenure is secure. The UPA government of 2004-09 floated two long-term schemes that provide useful lessons in formulating long term strategies.
The first long term scheme was the NREG launched in 2006. The scheme was a response to the distress seen in rural India and to the near stagnation in employment during the 1990s. The Congress recognised this. It responded with a bold scheme and persisted in its implementation in the face of criticism from economists who blamed it forfiscal profligacy and more. Risk in agricultural incomes has since declined and investments and employment have risen. The scheme provided immediate relief and as its implementation spread and persisted over time, it came to be recognised as a reliable relief measure. The Congress earned its political dividend from the scheme over the medium term in 2009.
The second long term scheme was the SEZs launched in 2006. Inspired by a similar Chinese model, the scheme aimed to attract investments by providing tax holidays and by engineering the diversion of land from agriculture to these islands of development. In the long run, these islands of development were expected to raise employment and exports. The Congress erred on this one. In the short run, this scheme caused immense stress in terms of land acquisition. Entrepreneurs got confused as the rules of the market place were being arbitrarily altered. The result was more trouble than the promised growth in employment and exports. The Congress escaped unhurt from this in the polls because the Left took the brunt for its brutality in Bengal.
A simple lesson from the SEZ experience is that it is not a good idea to push through strategies that are unfair and disruptive. The government?s initiatives at development should necessarily be inclusive. But, a larger lesson is that the government should stay away from interfering with the markets particularly when there are clear signs that the markets are functioning well.
In 2005 and 2006 when the scheme was conceptualised and given effect, private entrepreneurs were well into a recovery phase of the investments cycle. Gross fixed assets of existing manufacturing companies grew by nearly 16 per cent during 2005-06 ? a near doubling from the less-than 9 per cent growth in 2004-05 and less-than 6 per cent growth in 2003-04 or less-than 4 per cent growth in 2002-03.
Under these circumstances there was no compelling need to provide sops for investments. The diagnosis was thus wrong, the enthusiasm was misplaced and the effect was disastrous. Normal investments moved into SEZs. For example, the over Rs 50,000 crore investment by Posco, was not an SEZ but after the notification of the SEZ policy, it sought and was granted SEZ status.
Post liberalisation, the Indian private corporate sector learnt some invaluable lessons in managing change and managing growth. They have learnt that lobbying with the government is less important and growth through expansion, acquisition and competitiveness is more important. It is imperative that the new government?s budget builds upon these lessons by letting the markets work unhindered.
The Congress needs to re-affirm its faith in the markets as it did when it unshackled the economy from controls in the early 1990s. This time it needs to remove the several tax breaks given to various entities that riddle the market place in India.
It also needs to assert the government?s right to intervene in compelling situations like it did in tandem with the RBI when the country faced extraordinary conditions in September-October 2008. The timely infusion of liquidity to repair a broken market was bang on target. The fiscal stimulus thereafter had less justification. But, with the market getting back its rhythm, it is time the government refrains from further interventions.
It is time to take a long-term view again and identify those critical areas that need government attention. There are two lessons to learn from the two schemes mentioned earlier.
First, the NREG is a useful tool to bring into the mainstream, sections of the population that feel alienated because of serious underdevelopment. While security forces can enforce the law in the short term, the long term solution is inclusive development. If the government makes the initial clearings in these underdeveloped jungles, the private sector will follow and markets for labour and goods and services will take root. An employment guarantee scheme will not only solve the immediate problem of a poor monsoon but is also capable of addressing the larger problem of the spread of Maoist militancy.
Secondly, we must recognise that a globally competitive corporate sector cannot be built with the help of tax breaks. And, that tax breaks to the corporate sector cannot be the path to accelerated growth. In fact, tax breaks to selective sectors skew the investment climate and interfere with the efficient allocation of scarce resources. Schemes such as the SEZs should be scrapped. Correspondingly, the corporate sector should be freed of the shackles it faces in raising finance globally whether for equity infusion or for debt mobilisation.
The government is responsible for the creation of an efficient market place. The new Finance Minister?s budget speech is a good place to make that statement eloquently.
The author heads the Centre for Monitoring Indian Economy