The challenges before the government are clear. We need to focus on growth, employment, exchange rate of the rupee and the fiscal deficit. Inflation has been a bugbear, but it seems to have been laid to rest for a while.
Growth, especially industrial growth, is a serious cause for concern. The manufacturing sector’s annual rate of growth in December 2001 was 1.4 per cent and cumulative till December this fiscal is 2.4 per cent. It is sobering to note that the average industrial growth post liberalisation in the 90s was no different from that in the 80s: around 6 per cent. But, what we are looking at, right now is a nightmarish reality of almost no growth.
In this context, the emphasis on peak import duty reduction on consumer goods seems misplaced, even though the rupee has depreciated vis-a-vis the US dollar by about 4 per cent this fiscal. The depreciation of rupee vis-a-vis Euro has been lower at about 2 per cent and it has appreciated against the Yen by 3 per cent. Until we fix the problem of growth, we should desist from such anti-growth measures. Hence, reduction in the peak import duty should occur only after the second generation reforms are completed.
I am repeatedly struck by the contrast between the behaviour of developed countries and us. They have absolutely no hesitation in articulating and defending their interests. The US has at present 123 anti-dumping measures in place on steel, is contemplating raising tariffs on steel from the current 2 per cent to 20-40 per cent and is courting a trade skirmish with even the European Union on this issue. Why To protect its steel companies which are making losses. We, however, are more loyal than the king!
The problem of growth too is not so hard to decipher. It has long been clear that the Indian industry has a swathe of disadvantages in terms of labour flexibility, infrastructure, cost of power, red tape, inspector raj etc. But since a change in these affects vested interests, virtually nothing has happened. I also suspect that actually even vested interests may not really fight change, but it is a mixture of inertia and an inability to take any stand that is paralysing the policy. Whenever the government picks up courage, it succeeds. Witness the overwhelming response to the voluntary retirement schemes in banks or the privatisation process that is at last gathering steam.
Only with growth in industry, agriculture and services will the problem of unemployment be sorted out. Employment is not merely an economic state of being. It shapes lives. Unemployment distorts lives.
We need to fix the fiscal deficit and it can be done by reducing non-merit subsidies and pruning revenue expenditure. Fiscal deficit hurts the economy, not the government. A deficit creates an illusion of prosperity within the government. The central government operates under minimal external discipline. It is imperative that the Fiscal Responsibility Bill be passed expeditiously in undiluted form.
All tax is a form of forced labor (not my words but those of a Harvard Professor, though I could not agree more). Especially in our country, where you get precious little services in return. It is the farmer and industry that create wealth and employment. Their well being has to be the focus of economic policy making.
The Budget has to focus on growth and growth will not come from one single initiative; neither FDI nor infrastructure nor pump-priming. More than anything else, it has come and will come from providing a conducive and enabling atmosphere to economic agents.
From rhetoric to the specific. Let me list a few key initiatives I would like to see in the Budget.
1) A reduction in corporate income tax rate to 30 per cent or removal of the 10 per cent dividend tax.
2) Increase in personal income tax threshold to Rs 70,000 from Rs 50,000 per annum.
3) Further broad-basing of service tax, without an increase in its rate of 5 per cent.
4) A 150 per cent weighted deduction on in-house R&D expenses for all major industries.
5) Substantial reduction in non-merit subsidies.
6) A VRS for government employees.
7) A larger allocation of funds for agriculture and irrigation, but without the free-lunch syndrome.
We are living in fragile times. These call for clear and forceful economic leadership. I hope when the FM rises to present the Budget, he will rise to the occasion.
(The author is CMD, Bajaj Auto)