UNION BUDGET 2008-09

Three things that are conspicuous and stand out prominently in the Union Budget – 2008-09 presented by Sri P Chidambaram, Honourable Finance Minister are:-

1. a big stimuli to agricultural renewal along with substantial relief to farmers from indebtedness;
2. an enormous push to social sectors, particularly education and healthcare; and
3. substantial bonanza to the salary earning category of individuals, women and senior citizens. By and large, the budget is good and sensible with several positives to its credit.

FISCAL DISCIPLINE:

The budget has given adequate attention to fiscal consolidation and fiscal deficit and revenue deficit are sought to be restricted to reasonable levels. The micro economic figures reported and projected in the budget in terms of fiscal and revenue deficits indicate strict adherence to fiscal discipline. The fiscal deficit in 2007-08 is 3.1 per cent against the estimate of 3.3 per cent and revenue deficit is 1.4 per cent when compared to the target of 1.5 per cent. During 2008-09, the revenue deficit will be 1 per cent of GDP while the fiscal deficit has been pegged at 2.5 per cent of the GDP. It is heartening to note that the government has been able to achieve a higher Tax-GDP ratio. Tax GDP ratio has gone up to 12.5 per cent in 2007 when compared to 9.6 per cent in 2003-04. Tax GDP ratio is likely to go up to over 13 per cent in 2008-09.

PRIMACY TO AGRICULTURE:

The budget has accorded primacy to agriculture with larger allocation of resources and with higher investment in irrigation. Stepping up of gross capital formation to 16 per cent by the end of the Eleventh Plan period will go a long way in creating and expanding capabilities in the agricultural sector and in accelerating the growth process in the sector. It is budgeted to increase total agricultural loans to Rs.2.8 Lakh Crores in 2008-09.

The massive farm loan waiver scheme contained in the budget provides for waiver of loans amounting to Rs.60,000 Crores which will benefit 40 million farmers. Under the scheme, there will be complete waiver of all loans overdue on 31.12.2007 and remained unpaid until 29^th February 2008 in respect of three crore small and marginal farmers. The scheme also covers one time settlement scheme (OTS) for other farmers for all loans that were overdue as on 31^st December 2007 which remained unpaid as on 29^th February 2008. Under this scheme, rebate of 25 per cent will be provided against payment of 75 per cent of the dues. The implementation of debt-relief scheme will be completed by 30^th June 2008.

Having regard to the economic growth taking place under this globalising regime any relief to the marginalised sections including small and marginal farmers is welcome. As pointed out by the Prime Minister – Dr Manmohan Singh “considering the amount of depression that prevails in the agriculture sector this response mechanism (farm loan waiver ) is fully justified”. The scheme will help end the growing farming distress and desperation of farmers who are neck-deep in debt. Dr M S Swaminathan noted agricultural scientist has also commended the support given to farm sector and mentioned that the “budget is likely to stimulate agricultural renewal and mark the beginning of the end of the era of farmer suicides”. While as a matter of principle there may be a strong case for providing relief to farmers in distress a bail-out scheme of this magnitude may in the ultimate analysis affect the state exchequer and the banking sector. Banks are bracing up themselves to fulfil the Basel II norms and at this juncture such a scheme may tell upon their health. Under the scheme all those who have paid the instalments and interest will not get any benefit. Only those farmers who have defaulted will get the benefit of waiver. The scheme will serve as an incentive for non-payment and will have a demoralising effect on regular borrowers and in the days to come give rise to a culture of further and recurring defaults. The adverse impact of the scheme on repayment culture in rural areas will be there for a long time to come. All the same, the scheme will go a long way in spurring the farmers to greater efforts at producing larger quantities of food and such one time spur is a pressing need at this stage for India’s food security.

Radhakrishnan Committee has estimated the indebtedness of farmers at Rs.130000 Crores. The cost involved in the scheme is Rs.60,000 Crores which is not a budgetary outlay. But, it has been clarified that the government will reimburse equivalent amount to the banks. Hence, this will help banks in strengthening their balance sheets. Whatever the impact of the scheme on government finances, on banking system or on the repayment culture in rural areas, the Finance Minister has done his best for the farming community.

SPUR TO INDUSTRIES:

Reduction in excise duty on small cars and two wheelers to 12 per cent from 16 per cent reduction in excise duty on buses and chassis from 16 to 12 per cent cut in excise duty on pharmaceutical products to 8 per cent reduction in Cenvat from 16 to 14 per cent and shift to specific duties for unbranded petrol and diesel from advalorem rates will help the concerned industries and result in higher industrial growth. Corporate sector has not been a direct beneficiary from the budget. Corporate tax rates and surcharge remain unchanged. But, there are indirect benefits in the form of across the board reduction in Cenvat from 16 to 14 per cent, increase in income-tax exemption limit for individuals, etc which will help spur demand and promote sales on account of availability of extra money in the hands of tax payer as a result of lesser tax. Also, Indian industry will continue to enjoy the same level of protection against competitive imports with unchanged peak customs duty at 10 per cent. Corporate debt instruments stand exempt from tax deduction at source

ACCENT ON SOCIAL SECTORS:

The other significant aspect of the budget is larger allocation for education health and social sectors. The 20 per cent rise in outlay on education and 15 per cent on health care are welcome initiatives aimed at correcting the historic neglect of these crucial sectors. This will go a long way in building up human resources in terms of talent, health and productivity, so necessary for creating and expanding capabilities in the economy. As a result, India’s ranking in human development index (HDI) (now 128) may also go up. 54 per cent of our population is less than 25 years of age. By focusing on these crucial areas, we can reap huge demographic dividend.

The budget provides for Rs.16,000 Crores for National Rural Employment Guarantee Programme which will be extended to all 596 rural districts. Although the share of agriculture in GDP is just 18 per cent agriculture presently, bears the burden of 58.6 per cent of India’s population. In ther words, 58.6 per cent population depends on agriculture for livelihood. The implementation of the national employment guarantee programme in all 596 rural districts will help provide gainful employment to surplus manpower now available in agricultural sector. By far the most valuable possession of an individual is his body, his physical and mental labour. The national employment guarantee scheme, if implemented in all rural districts will provide larger opportunities for employment which will facilitate inclusive growth.

Shortage of skilled workers is found in several parts of the country. The proposal to upgrade industrial training institutes is a welcome initiative. The establishment of 16 new central universities, three more Indian Institutes of Technology and two Indian Institutes of Science Education and Research will go some way in meeting the growing demand for quality institutions of higher learning.

Considering the robust tax revenue, the Finance Minister could have considered allocation of larger funds to the infrastructure sector. No doubt he has increased allocation to various schemes such as, Bharat Nirman, NHAI etc. But, the focus and attention given to infrastructure sector is not adequate.

REFORM AGENDA IGNORED:

The Finance Minister has made an allusion to India growth story and average growth rate of 8.8 per cent achieved during the last 4 years. He could have given a fresh push to economic reforms in order to arrest and reverse the recent slow down in growth to 8.7 per cent. Business sentiment is at present very fickle and is vulnerable and the optimism that was obtaining in the past has vanished. Another dose of reforms was necessary at this stage.

The Finance Minister has made an llusion to the need for listing of all public sector enterprises in order to unlock value. But, he has not spelt out any specific action plan with a definite time frame in this regard. He is silent on policy reform options figuring in the economic survey. Unvieling of a programme for implementing pending reforms such as labour reforms, reduction of government equity in public sector enterprises, banking reforms, consolidation of banks, pension reforms, expenditure reforms, reform of state government finances, reform of urban transport system, power sector reforms, reform relating to FDI in retail sector, reform of state financial corporations, tax reform etc would have given a right signal to the economy and the market which would have in turn, enhanced business confidence and created all-round optimism so necessary to spur investments and growth.

The raising of exemption limit for income tax to Rs.1.50 Lakhs and to Rs.1.80 Lakhs in the case of women and to Rs.2.25 Lakhs in respect of senior citizens is a welcome step. This will please the middle class. It will also enhance consumer spending and promote demand for goods and services which will in turn, give a boost to industry.

MONITORING OF OUTCOMES:

The Finance Minister has announced that he will institute a monitoring mechanism to monitor and evaluate the outcomes and physical results accruing on account budgetary allocations and spendings stress on physical results and outcomes rather than on financial outlays is indeed a welcome step. For achieving physical results and outcome commensurate with allocations and spendings there should be stress on good governance with accountability for performance and results. The accent must be on deriving physical results equivalent to Rs.100 for every Rs.100 released and spent. There should be stress on achieving definite results according to a time bound programme. It is advisable to break and split the targets into quarterly targets and physical results must be evaluated with reference to such quarterly targets. Evaluation of results both quantitatively and qualitatively vis-à-vis the fund releases and spendings will go a long way in ensuring better governance and enforcing accountability for performance and results. To what extent the Finance Minister will be able to assess the outcomes will unfold itself in course of time. However, the allocation of Rs.10,000 Crores under Plan B to provide additional funding to states based on their performance in the implementation of specific schemes will serve as a strong incentive to achieve physical and qualitative targets. What we need is superior execution and super implementation. The government machinery at state level is not competent to ensure this and hence, it will be better to involve private sector in the process. Similarly, monitoring to be objective must be outsourced to outside private agencies. If it is entrusted to bureaucracy it is bound to become another source of misuse of power, corruption, favouritism etc. It is better to entrust the task of evaluation to outside professional organisations like KPMG, Price Water Coopers, or Ernest and young or any other professional organisations.

The proposal to develop bond, currency and derivatives markets with necessary regulations and to arrange for seamless trading of securities with uniform rates of stamp duty across different states are significant initiatives in the direction of reform. Development of a full-fledged bond market will help increase the flow of capital to infrastructure projects.

In overall terms, the budget is well-crafted and appropriately designed with several positives built into it. The decision to put agriculture in the center stage will boost rural economy and improve demand. The huge bonanza budgeted to be provided stands balanced with smarter economics. If the budget proposals and schemes are carefully and meticulously implemented with accountability for physical results and outcomes commensurate with spendings at all levels the same will surely deliver the intended outcomes and take the economy along the path of high growth.