At the full meeting of the Planning Commission last week, additional largesse was allocated for what were called focus areas of the CMP. Rs 2,000 crore were allocated additionally to the Sarva Siksha Abhiyan, Rs 1,232 crore more to the Mid-day Meals Programme, and additions to the National Social Assistance Programme and to the Accelerated Irrigation Programme. Additional funding for state plans of Rs 4,725 crore was also announced. All this, with an announcement that government is putting in place corrective measures to achieve a high economic growth rate. Notwithstanding the fact that total allocations are Rs 2,000 crore over that announced in the budget (which by itself makes a mockery of the parliamentary sanctity of the budgetary process), there is a promise that deficit would be kept in check. Sheer magic of which the famous illusionist David Copperfield could be proud of.
Unraveling, it is seen that the Sarva Siksha Abhiyan, started two years ago as a major initiative for providing universal access to primary education, is being pursued vigorously. So is the Mid-day Meals Programme. Allocation to states is, very interestingly, on the normal pattern of Centre-State allocation ? no correctives here, except that there?s no information about what the states are going to do and whether they would be able to do anything at all.
Incidentally, there is no talk of better implementation or focusing. Of course the finance minister has said publicly that he cannot wait for delivery mechanisms to improve, to allocate resources, he will allocate, and things may improve ? surely a very prudent management of government finances.
Last five months? figures indicate that the fiscal deficit target will be significantly breached. If there were to be cuts in public expenditure to keep the fiscal deficit in control, there would be a slowdown in Plan implementation. Additional resource allocation, without resources being in sight is quite ambitious, particularly when the Planning Commission, an honourable entity, says that deficit would be controlled. It is time that there is transparency and the public is given a glimpse of how the alchemists are working to make this possible.
On the same day, the Reserve Bank has sworn its allegiance to its paper on a ?comprehensive framework for ownership and governance of public sector banks?, which effectively limits all future interest in foreign investment in banking. The most important aspect about this document is that it nowhere describes the problem it is trying to address, or why existing regulatory powers are inadequate for addressing them. There are apprehensions that the move for merger of public sector banks is intended to minimise the inevitable fallout of rising yields on bank balance sheets and that stresses in the smaller banks can be hidden away for some years.
There is also little clarity so far on other items in the reform agenda. Final decisions on foreign direct investment in airports, insurance, telecommunications are still awaited. Progress on pension reforms has made little progress, as also the activities necessary for implementation of VAT. Project lending activity by banks and financial institutions is yet to pick up. There is no doubt, evidence of a pick up in investment, in particular in steel, automobiles, light engineering, chemicals and some other sectors. However, there are two interesting aspects ? a considerable portion of the investment is out of reinvestment of owned resources ? equity, rather than debt. Second, incremental employment targeted is quite small. If equity is considered less expensive than debt, as these investors are no doubt doing, then either they have been making much more profits than they anticipated (price inflation) or that they find access to debt difficult and cumbersome. Further, if incremental employment targets were low, then the CMP objectives of significant employment growth through additional investments in industry would not be realised.
This leads, inevitably, to the management of inflation. Claims are that it is imported through oil prices. But other countries, including Japan, who depend heavily on imported oil, are not reporting 8% inflation figures! Further, the healthy improvement in exports (18%) should mitigate these effects. There is evidence of excess liquidity, of cheap and easy access to consumer and retail credit, of corporate balance sheets showing healthy increases much in excess of that warranted by increases in input costs. Measures to contain inflationary trends need to be put in place urgently.
? Additional largesse was allocated for what are called focus areas of the CMP ? Additional resource allocation without resources being in sight is ambitious ? Like in Latin America, an average citizen wants a life and a job to go with it |
The macroeconomic fundamentals of the economy are still strong. Strong growth in exports, in the service sector, and fresh investments in manufacturing point to the confidence of the entrepreneurs in the future of the economy. The direction of public investment, towards infrastructure, education, health and water are most certainly the right ones. The worry is that no new ideas or concepts have emerged, that the reforms have stalled, that there is considerable uncertainty about inflation and the fiscal deficit, and that there is very little activity on the employment front.
A survey conducted by the Economist among several Latin American countries compares perceptions about democracy by the citizens in 1996 and 2004. In a majority of them, there?s a marked decline of faith in democratic institutions to deliver economic growth and welfare, and a significant increase in the number of people who aren?t averse to some benevolent despotism. The message here seems to be that they are not so much concerned whether the form of government is socialist or capitalist. The average citizen wants a life ? and a job to go with it. This is almost certainly true of the Indian citizen as well. So would the government get on with it?
The author is a former finance secretary and economic advisor to the PM
