Dear Finance Minister
Dear Finance Minister,
By the time this column is published, you will have finished your meetings with industrialists, agriculturists, trade unions, bankers, capital market players and economists, and gotten down to the serious business of budget-making. From press reports, it would seem that you have already had an earful of policy advice ranging from the obvious (“raise investments”) to the ridiculous (“raise interest rates on provident fund”). Thus, the marginal utility of additional suggestions must be quite low. Even so, pardon me for making a few observations.
While there may be no political need to declare it, the fact is that you have inherited a better economy than your predecessor. In 2003-04, GDP would have grown by 8.1 per cent. This will be the second highest growth rate in the world, and the best since the advent of reforms. There is every indication that 2004-05 will see GDP growing by at least 6.5 per cent. Thanks to this growth, tax revenues are quite buoyant. We may quibble about whether the central government’s deficit is 4.8 per cent or 5 per cent of GDP — but the fact is that it is lower than what it has been for over a decade. Foreign exchange is well in excess of $117 billion, which is a far removed from what you had to deal with in your previous innings. Most importantly, India is back on the international radar screen. Eighteen months ago, references to “Asia” in any international conference meant the region bounded in the west by Thailand. Today, people are talking of India in the same breath as they are of China.
What I will now share with you may surprise you, especially given my alleged standing as an impatient reform radical. The suggestion is good old Americanese: “If it ain’t broke, don’t fix it.”
Coming so close as it does after the election results, don’t be tempted to use the very first budget in your second innings as a vehicle for ushering sweeping change. Some of your political partners within the cabinet and outside government believe in truly strange notions of economics. It might not be a good idea to make them see red within 45 days of assuming office. Instead, assume that your government will be there for the next five budgets as, as you did in your previous stint at the North Block, use your second budget for the big ticket changes. By that time, you will have not only sussed out your partners, but will also have got a pretty good sense of the support you can expect from your Prime Minister and 10 Janpath.
Keeping this in mind, let me make a few specific suggestions. First, as you have yourself suggested, this is a budget to make the case for additional investments in physical infrastructure. As far public investments go, you should have no problems in increasing the expenditure on road programmes, especially for state highways. Moreover, you clearly have the revenue buoyancy to raise public investment in power projects, especially under the aegis of NTPC and NHPC.
Second, it may be well worth the while for you to make a strong case for rural housing. According to the 2001 Census, only 41% of rural Indian households live in permanent or pucca houses; a mere 21% of rural houses have concrete roofs; and only 23% of rural families having houses can claim to have a toilet. These are sad statistics. Yet, there is no earthly reason why these statistics cannot change for the better.
Affordable home loans at falling interest rates have played a major role in creating a housing boom in urban and semi-urban India. Can you use this mid-term budget to create a similar environment for rural India? For instance, why can’t public sector banks, with their extensive rural networks, offer housing and home improvement loans up to Rs.1,00,000 for farmers to better their homesteads? Today, such loans can be offered at 7.5 per cent floating for 15 years. To sweeten it, public sector banks may consider offering these loans at one per cent point below the floating rate, which can be bridged by a modest tax break for the lenders.
The benefits of this scheme are enormous: more rural housing, greater rural employment, and higher demand for brick, cement, steel and other building material. This is good, growth oriented economics and even better politics, and is well worth incorporating in your June 2004 Budget speech.
Third, given the skittish manner in which the market is behaving, you might consider the budget to be a medium for making some soothing noises for business and international investors, without any cost to the exchequer. For instance, you might consider re-appointing Prof. Ashim Dasgupta as the convener of the VAT group, and commit to implementing VAT by 1 April 2005. You might also wish to clearly reiterate the overall policy of promoting FDI — provided you can stop newly appointed ministers from making unilateral decisions.
Fourth, as an exercise to test the waters, try to see whether you and Praful Patel can turn around civil aviations — which has a long and illustrious history of being a recalcitrant, anti-reform ministry. As a starter, it is worth seeing how much of the Naresh Chandra Committee report on civil aviations can be implemented in this budget. If, in the face of Sitaram Yechuri’s dharnas, you can get even 50 per cent of it implemented, kudos to you and Mr. Patel.
Fifth, may I suggest that you don’t implement the full package of Vijay Kelkar’s direct tax recommendations just yet? It hurts me to write this, since I was a part of the committee and wholeheartedly endorse all its recommendations. Consider this as a pure political economy suggestion. Implementing Kelkar’s direct tax recommendations is a must; but, notwithstanding what is given in the CMP, I am willing to bet that you won’t have broad-based political support to implement the entire package in toto. And piecemeal implementation of Kelkar will be a kiss of death to direct tax reforms. Therefore, I’d suggest that you prepare the groundwork for direct tax reforms throughout 2004-05, for introducing them in February 2005. In the meanwhile, you can certainly go ahead with Kelkar’s recommendations regarding indirect taxes.
None of what I have suggested is radical. Indeed, I am getting ashamed at my conservativeness. It certainly marks the passage of age. Could it also mark the glimmering of acumen?
Published: Financial Express, June 2004