PC delivers politically correct

Indian Express, 1 March 2007

Finance Minister P. Chidambaram's Budget 2007 tabled in Parliament on Wednesday was a tightrope walk, a balance between the need to satify leftist sentiment and the requirements of a fast growing globalising market economy that must compete in the world today. Without rocking the boat and largely resisting pressures to bring back failed policies, the budget steers a course towards minimum changes so as to do minimum damage to the high investment, export and growth. The do-nothing budget may have disappointed those looking for reform in the UPA's economic policy agenda, but given the nature of the UPA government, one should perhaps breathe a sigh of relief that the populism was limited to a few new schemes and little change in taxes.

The fiscal deficit - which measures the extent to which government is spending beyond its means - is budgeted to come down from 3.7 percent of GDP to 3.3 percent. At the same time the primary deficit, which is a better measure of the present government's deficit as the legacy of previous governments is stripped away, now shows a surplus. When the FRBM Act was passed in 2004, there was a lot of scepticism on how a populist UPA would achieve these targets. Budget 2007 shows the importance of Parliament tying the hands of the government. This reduction of deficits makes space for the private sector to invest and to generate growth.

The speech began on an ominous note, with a ban on futures trading in wheat and rice. This 1970s style announcement seemed grossly out of place in India of 2007, and strikes a queer note when compared with India's attempts at becoming a mature market economy. The Abhijit Sen committee set up to look into this will hopefully find a way to strengthen these markets instead of banning them. Yet, other than this concession to old socialism, there was no important reversal of reforms.

On taxes, one element of strategy that has been rightly emphasised has been the lowering of customs duties. The peak rate has been reduced, and the customs rate on many goods has been reduced. This will help curb local inflation, reduce raw material prices in India, and bolster export competitiveness. Lowering customs duties much further requires the introduction of the GST. On this front, unfortunately, the budget speech has failed to offer an implementation path. Phasing in the GST has to involve elimination of the CST. However, instead of showing a game plan for removal of the CST, all that was done was a reduction of the CST by one percentage point. The ethos of the GST is to move towards low and uniform tax rates on all goods and all services. But the speech was replete with tax rate changes that tinker with the fine structure of the economy in ways that are now well understood to be deeply harmful. In a case of extreme mission creep, tax policy has been harnessed for price control by promising differential excise rates to cement producers based on the price at which they sell. Service tax has been extended to a few more services; in contrast with the ethos of the GST which involves taxing all services. A key milestone towards the GST is the integration of central excise and central service tax, with a unified IT system. This key announcement was not made.

In a new initiative on education, the FM announced 1,00,000 merit-cum-means scholarships for secondary students from Class IX to XII. The emphasis on primary schooling has resulted in students finishing primary schools but the limited number of secondary schools in rural India prevents them from going on to secondary education. In addition to addressing the immediate issue of schooling for these children, for the economy there are important long term implications of placing public resources in the hands of parents. The emphasis on merit, through an examination, is well placed given the difficulties that the country expects to face in the development of good quality labour supply.

For the rest, Budget 2007 made a significant increase in the pet schemes of the UPA. Giving in to the political pressure for larger spending on a schemes the Gross Budgetary Support for the Plan will be raised from Rs 1.7 lakh crore to Rs 2.0 lakh crore. Expenditure on school education is slated to go up by 35 percent. Rs 7,324 crore will be spent on mid-day meal schemes. Rs 24,603 crores will be spent on Bharat Nirman. Rs 15,291 crore will be spent on health and family welfare, up by 22 percent from last year's budget estimate. The NREGS is proposed to be extended from the present 200 districts to 330 districts. An initial budget of Rs 12,000 crore will be alloted to the scheme but since the scheme is demand driven, if more money is needed, it will be provided later.

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