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Home > Archives (2006 on) > 2007 > May 19, 2007 > Union Budget 2007-08: An Exercise sans Realism

Mainstream, Vol XLV No 22

Union Budget 2007-08: An Exercise sans Realism

Saturday 19 May 2007, by A V V S K Rao

The functional-financial theorists like Lord Keynes (Cambridge), Learner A.P. (London School of Economics) wanted public finance and the Budget to subserve the ends of macro-economics like growth in investment, employment, output and consumption etc., rejecting the classical advocacy of small and surplus Budgets. On the other hand, development-fiscal economists like Richard Musgrave (Harvard) and Stiglitz (Columbia) added the goals of capital formation, re-distributive justice, price stability etc. Any macro-economic policy instrument should aim at achieving efficient production and acceptable distributions.

The Union Budget 2007-08 alludes to the epitome of traditional Indian policy thinking, that is, development of the farm sector. Part A of the Budget in a meandering way stressed the need to raise the growth rate in the agriculture sector (four per cent), faster employment creation, physical infrastructure as well as health and education services to all. It was stated that these objectives should be kept in mind while allocating resources to various sectors. This is a laudable proposition. But this does not mean that the Budget can be absolved of some omissions and commissions to which a reference will be made shortly.

Farm Sector

PAMPERED by politicians and policy-makers, able to lobby for and articulate their demands on the same level as the khadiwalas in politics, the farm sector almost always has been able to get favourable policies for the past five decades. In spite of the pro-farm lobby among politicians, political parties and social activists, the farm sector is unable to gear up to the challenges. Again, it is justified that the Budget raised the institutional credit for the farm sector from Rs 175,000 crores to Rs 225,000 crores or by 28.6 per cent and at conceessional interest rates. It is aimed at bringing an addition of 50 lakh new farmers to the banking system. This excluded, the Accelerated Irrigation Benefit Programme (Rs 11,000 crores), fertiliser subsidies, agricultural insurance and the boost to agricultural research in the WTO context are welcome. Undoubtedly, these are needed steps.

However, the push factors and positive linkages have not been kept in Budget preparation and policy-making.

Non-Farm Sector

THE Industry’s persistent appeals to the govern-ment, the need to keep the industrial sector on a higher trajectory and to invest in infrastructure to push up economic rejuvenation have been addressed, though partially. The Technology Upgradation Fund (TUF Rs 911 crores) will benefit only the traditional textile industry. The Small Scale Industry (SSI) gets relief as per the purpose of payment of excise duty—the exemption limit is raised from Rs 1 crore to Rs 1.5 crores. The removal of surcharge on income tax payable by Small and Medium Enterprises (SMEs) with a taxable income of Rs 1 crore and less will certainly benefit 12 lakh firms and companies. The modern industrial sector is not benefited much by the Budget proposals. In fact, there is deliberate policy- making to marginalise the non-farm sector including the high technology corporate sector. There are minor modifications in excise duty leviable on certain not-so important items like watch-dials, umbrellas, biscuits, pet-foods etc.

No serious measures have taken to reduce the prices of components and basic industrial inputs. On the other hand, the rise in excise tax on an important segment of the industry like cement, extension of Minimum Alternative Tax (11.2 per cent) to include the IT sector would have a negative impact. The Budget has neutral or no positive impact on many of the manufacturing products. The measures in the Budget in no way help the manufacturing sector to go for high technology products meant for exports in the WTO regime.

The rise in the exemption limit (Rs 8 lakhs) of service tax for service providers throws 2 lakh assessees out of the tax net. The Budget is ready to forgo a Rs 800 crores revenue. This is clear appeasement. It is prudent in a growing economy to rationalise taxes and widen the tax base. The Budget proposals are going to create new problems in the development of infrastructure, power, high technology product development and ancillarisation of the non-farm sector. The path sought to be created for manufacturing is bumpy. Undoubtedly, the Budget 2007-08 is ambitious but not bold. The Budget will further the macro-economic imbalances. For instance, a high amount of farm credited at Rs 225, 000 crore will achieve its purpose only when debt relief measures are taken on time. Otherwise, credit for productive purposes will be used for consumption purpose. The danger is that the farm sector will become a constraint on growth.

The whole problem in the not-so-laudable Budget is due to lack of clarity with regard to the content and quality of the development proposed to be achieved. This has resulted in an improper development strategy. The result is that the policy instruments have not been suitably formulated. The basic assumptions on which the Budget rests, namely, continuous achievement of more than eight per cent GDP growth, containment of inflation below five per cent and revenue buoyancy can hardly be termed realistic. The strategy of development is harping on the farm sector growth. The fact is that the wealth generation (value added) from Indian agriculture has been declining considerably during the past five decades. The wealth generation from the farm sector is less than 10 per cent in all advanced countries.

In economic literature there are no evidences which show an economy achieving higher growth rates continuously and reaching higher levels of advancement with the farm sector as the base. The need is to lay emphasis on rural development (with stress on non-farm activities), ancillarisation, developing a vibrant manufacturing sector and enhancing quality of services. The economy must be able to reduce 60 per cent dependence on villages to 35-40 per cent by the end of Twelfth Plan. As per the HRD Report 2006 (UNDP), by 2015 nearly 66 per cent of India’s population is going to be in the 15-65 years of age group. This group needs basic education, skills, training and access to capital and technology. The contribution of this age group is going to be immense. Only the non-farm industrial sector can meet the challenges of demographic transition and rapid globalisation. Macro-economic policy instruments like Budget should create a smooth path for higher industrial development. The Budget 2007-08 rests on the outdated voodoo economic philosophy.

Dr A. V. V. S. K. Rao is a Senior Professor, Department of Economics Osmania University, Hyderabad.


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