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| There is no big picture :Yashwant Sinha | | | The economy has been on a high growth path for the past three years. Except for some underlying concerns, this trend is likely to continue. What is more, confidence level in the Indian economy, in India and abroad, is very high. The conditions were thus most favourable for the finance minister to present a courageous and path-breaking budget. Instead, this budget has turned out to be a non-event.
The finance minister has not addressed the underlying concerns in the economy. Inflation has been kept artificially low by not passing on the full impact of petroleum price increases to consumers. The Rangarajan committee recommendations have not been touched in the budget. The government is merely postponing the evil day. May be they will raise prices when Parliament is not in session but whenever it happens it is going to add to inflation.
There is already pressure on interest rates. There is also a liquidity crunch in the economy. This is bad news for the economy as a whole.
The single most important factor which had triggered the growth of the economy was the softening of interest rates during the NDA regime. Higher interest rates will have their adverse impact on consumer spending, house construction and the economy as a whole. It is already affecting the balance sheet of Indian companies.
There are already emerging signs of a slowing down of the industrial sector. The index of industrial production is lower this year than last year. In December, 2005, it touched a low of 5% growth compared to December, 2004. The growth rate of intermediate goods has fallen from 6.9% in April-December last year to 2.2% this year.
Infrastructure is a key area of the economy. The finance minister has done precious little for infrastructure in this budget. In fact, by raising MAT (minimum alternate tax) from 7.5% to 10% and abolishing Section 10(23)(g) of the Income Tax Act he has made life more difficult for infrastructure companies.
After two years and a lot of effort, the finance minister has proudly announced that the first proposal for funds has been received by the India Infrastructure Finance Company Ltd and that in principle approval has been given to three road projects in Gujarat.
The concessions to the farmers were long overdue. The then Prime Minister, AB Vajpayee, had already announced before the elections of 2004 that the interest rate for farmers would be reduced to 6%. Therefore, reduction of interest rate on short-term loans to farmers to 7% is welcome but inadequate. I wish the finance minister had recognised the contribution of the Kisan Credit Card scheme in augmenting farm credit.
As far as rural development is concerned, the increase of allocation to Rs. 24,026 crore compared to Rs.21,334 crore in the revised estimates (RE) of 2005-06 is only a nominal increase in view of the fact that it is this ministry which is responsible for the National Employment Guarantee scheme and most of Bharat Nirman schemes. Similarly, there is a decline in the allocation of the department of road transport and highways from Rs 21,886 crore to Rs 18,378 crore. The shortfall of nearly Rs 5,000 crore in the RE compared to the BE is also a matter of concern. The allocation of for the ministry of urban employment/poverty alleviation is also less than last year. In HRD, has the cess been completely passed on?
The budget does not talk of economic reforms at all. Disinvestment has not been mentioned. Pension reforms have been mentioned in passing. The question of subsidies depends on consensus. Even privatisation of coal mines has sought to be done through the back door when he says that it has been decided to deblock coal reserves of 20 billion tonnes. The only condition will be that the private companies will have to have firm supply contracts with steel, cement and power companies.
The budget is timid on taxation. There is no new initiative on housing or on savings, though the rate of household saving has actually declined. He has tinkered with excise duties when he should have gone for a bold step like reducing the mean rate from 16% to a lower figure.
Similarly, on the custom duties front, he should have reduced the peak rate by a full 5% instead of the 2.5% that he has announced. The CVD of 4% on import duties, the sectoral adjustments, like in the case of steel and the across-the-board increase in service tax, will have an inflationary impact on the economy.
The idea of levying service tax on ATMs is a bad idea. Financial intermediation should not be taxed. He should have also completely abolished such harsh taxes as the Banking Cash Transaction Tax and the Fringe Benefit Tax. He has not mentioned why he has abolished the 1/6 scheme.
The economy is already on auto pilot. It has a built-in momentum of its own. But, it may not be sufficient to propel it to towards 10% growth. The finance minister has not outlined any vision how the country shall move towards that growth trajectory.
Perhaps, we should be grateful that he has not done any great damage to the economy by his budget. But he has certainly missed a golden opportunity to present a budget which would have helped make a paradigm shift from 8% to 10% annual growth rate. There is no big picture in this budget.
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