What does Budget 2004 really mean for you? Will it increase your income? Will it create more jobs? Will it help your business grow? As the clock struck 12.50 p.m. on July 8 questions on the budget started flying thick and fast. If Finance Minister P. Chidambaram's speech was subjected to extra scrutiny it was because of his reputation as the presenter of dream budgets and UPA's promise to give reforms a human face.

To have a final word on how good Budget 2004 really was India Today called a meeting of the Board of India Today Economists (BITE)-its think tank on the economy. It comprises six leading economists: Suresh Tendulkar, professor, Delhi School of Economics; Indira Rajaraman, RBI professor, National Institute of Public Finance and Policy; Subir Gokarn, chief economist, CRISIL; Bibek Debroy, director, Rajiv Gandhi Institute of Contemporary Studies; Kirit Parikh, member, Planning Commission (who has now resigned from BITE) and Sidhartha Roy, chief economist, Tata Group. Montek Singh Ahluwalia, deputy chairman, Planning Commission, was the chief guest. UTI and IDBI Chairman M. Damodaran was a guest panelist and Jairam Ramesh, member, Rajya Sabha, moderated the discussions. Following is the BITE verdict on four key issues concerning Budget 2004:

Does Budget 2004 present a new
HUMAN FACE?
No. Five out of six BITE economists felt that the budget doesn't go beyond putting fresh paint on the human face of past budgets. But the finance minister has taken a few baby steps.

SUBIR GOKARN Chief Economist, CRISIL

GOKARN: Reforms with human face have two dimensions. The first is about its benefits percolating down to the masses. The most obvious link here is employment. In over 10 years of economic reforms we have not been able to generate the scale and kind of employment that would benefit the masses. This budget doesn't do anything in this regard, nor have the previous budgets done much. New jobs are being created, but going by the number of people waiting to be employed we haven't been able to address even the tip of the iceberg. The second aspect relates to direct public welfare schemes. This issue has got prominence in the budget. But more money alone is not the answer. We need mechanisms and institutions to ensure that money reaches the beneficiary. Maybe it is not the Finance Ministry's job to talk about mechanisms. The implementation comes at different levels. But until I see coordination between money and mechanisms, it is difficult to make a judgement.

JAIRAM: Suresh, Subir has identified employment as a key determinant of the human face of reforms. Official data show that the unemployment rates in the organised sector are falling. Is that true?

TENDULKAR: In India, self-employment is predominant. And when it comes to self-employment low productivity is a bigger problem than outright unemployment. Higher economic growth is one way of generating more jobs and that is where I am disappointed to see the budget has done little to ensure 7-8 per cent rate of economic growth.

INDIRA RAJARAMAN RBI Professor, NIPFP

RAJARAMAN: There are a few good features of the budget in terms of providing a human face. The food-for-work programme in 150 select backward districts is good because it recognises the regional dimensions of poverty. I also welcome the enhanced allocation for the Scheduled Castes and Scheduled Tribes. It is tragic that poverty in India still has a caste and tribal dimension.The emphasis on restoration of water bodies is good. The selection of districts identified by the M.S. Swaminathan Foundation with potential for agri-business is a recognition that there are particular areas where concentration of funds could achieve a substantial expansion and create employment.

There were some not-so-good features. I oppose the resurrection of the Rural Infrastructure Development Fund (RIDF). The fund was created to route banks' unused lending commitments for agriculture back to rural development. I have done research to show that the projects funded by RIDF have not always been well identified. I didn't like the target of doubling agricultural credit in three years. This is a throwback to an earlier era when there were quantitative targets for credit without concentrating on the delivery mechanisms. Finally, the budget talks of support to extension of health insurance. I doubt if that will fulfil the particular need of the very poor. Even though the percentage of the population living below the poverty line is falling there are instances of non-poor families becoming poor. What causes this regression is invariably some major health expenditure. If we want to give a genuine human face we have to pay attention to the need of the very poor for health protection.

BIBEK DEBROY Director, RGICS

DEBROY: One of the indicators to gauge the budget's human face is the extent to which it has freed up resources from wasteful expenditure and directed them towards health and education. Most health and education expenditure in India are state subjects. The budget does attempt to rehabilitate state finances, which is welcome. But it hasn't redirected resources to anti-poverty schemes. One can argue that Rs 3,000 crore for Bihar is fine because it is the poorest state. But certainly one cannot use that same rationale for Rs 20,000 crore being frittered away on PSUs. That amount of money should have been used on education and healthcare. On the matter of improving the efficiency of spending, I like the idea of food stamps proposed in the budget. If it works, it will enable us to target the subsidy better. Much of the budget's promise of improving efficiency has to be fulfilled by the Planning Commission.

PARIKH: There are some new things in this budget that could make a difference. The emphasis on irrigation, on restoring water bodies, was long due. Food for work is very important. A study I did 10 years ago showed that only 15 paise out of every rupee that the government spends on PDS reach the poorest. Employment guarantee schemes like the one run in Maharashtra are more effective because 50 paise out of every rupee reach the poor.

JAIRAM: For those not familiar with it, Maharashtra's is perhaps the longest running anti-poverty programme in the country. It started in 1973.

PARIKH: The commitment to introduce an employment programme is an effective anti-poverty step. We don't need extra money. The budget has indicated that the Government is going to take the whole alphabet soup of programmes (like the SGRY, PMGSY, SGSY, DDP, WDP) and restructure them to eliminate the overlap and concentrate funds on effective schemes. That should promote the human face.

Are new investments and jobs on the
HORIZON?
With or without the budget, an investment revival is round the corner. But new investments won't create the kind and the number of jobs that the economy needs right now.

JAIRAM RAMESH Member Rajya Sabha

JAIRAM: Damodaran, to transit industry from 6-7 per cent annual growth to a higher growth, revival of private investment is key. Data suggest an investment stagnation whereas if you read newspapers and go by anecdotal evidences you see an investment boom. Do you see new investments on the horizon?

DAMODARAN: For the past 3-4 years the lending community had been complaining about the absence of good business proposals. That forced them to lend to the most preferred borrower-the government. We are seeing a reversal of that trend. We are seeing good business proposals coming now. In the past public-sector banks and institutions were judged by the wrong yardstick of sanctions. Over the years lenders perfected the art of issuing sanction letters with a long list of pre-disbursement conditions, most of which were difficult to fulfil in a lifetime. There is a sentence in the budget speech that talks of facilitating small and medium enterprises' (SME) access to capital market. That's welcome since SMEs have been edged out. Compliance standards are high and listing requirements have got tougher. The big players are able to raise money, the small are getting pushed out. I also think that the norm of classifying a debt as non-performing after just 90 days (of non payment)-which is the international norm-is not suitable in the Indian situation where a supplier does not see money for 120 days.

Another reason why good ideas are not getting funded is because we don't have genuine venture capitalists in this country. We have institutions that claim to provide venture capital, but are really providing last mile finance. There are people giving money to listed companies and claiming they are venture capitalists. We have specific institutions like SIDBI to deal with financing of SMEs. One may ask how much has it done and why has it not done what it should have done. I really don't have evidence to argue either way.

GOKARN: The inability of banks to lend against anything other than balance sheet or hard assets reduces the potential flow of funds to start-ups. While we did make many changes in the banking system, I think now in hindsight, we may have geared excessively towards risk management. It's not that risk management isn't important. But we may be throwing the baby out with the bathwater on this risk management. I think a lot of the bigger banks are finding ways of getting round this constraint. But there are still a number of constraints.

Looking at the new investments even at the company level, there isn't much evidence of new enterprises and new businesses coming up. What one sees is large successful companies adding new capacities or streamlining existing facilities. These don't result in big job creations. Companies that have gone through five or six years of massive downsizing of the labour forces are not looking to hire new people, at least not in general. New jobs are going to come from new enterprises. And that is where finance is a constraint. If we don't get a massive upsurge in new businesses, of the kind we saw in the mid-1990s, we are not going to get that surge in employment.

JAIRAM: But are you seeing new business formation and employment in the services industry?

GOKARN: Yes, that is where the contrast becomes all the more striking because services are not constrained by rigidities of labour laws. The barriers to starting a service enterprise are much lower than those for starting a manufacturing company in terms of both the start-up issues and the survival issues. A manufacturing establishment finds it difficult to start. Once it is up and running it finds it difficult to shut down.

Has the saving environment
IMPROVED?
No. Though finance minister was right in not doling out new tax incentives for savings, he should have avoided being discretionary in granting new exemptions and hiking service tax rate.

M. DAMODARAN Chairman, UTI & IDBI

DAMODARAN: Except for a couple of statements of intent, I do not see much in the budget to promote savings. There is some avoidable confusion especially in investments through the mutual fund route. I think a little more clarity would have helped. I believe that a major reform of the tax structure is going to happen down the line.

RAJARAMAN: Repeated research results have shown that tax incentives do not impact upon savings rate or even on the diversion of savings towards financial instruments. They divert savings towards particular financial instruments. In recent years, because of several schemes going bust, urban savers are not looking so much at tax rates or tax incentives or interest rates as at the security of their savings.

DAMODARAN: We need a massive investor education programme which indicates to potential savers what are the instruments where they can invest consistent with their own risk profile.

GOKARAN: There are millions of people in India who are either not able to save or save inadequately because the right kind of opportunities don't exist. One instance is the growing need for long-term (post-retirement) savings, especially since life expectancy is rising. The growth of private insurance and pension funds have filled the vacuum to an extent. The government's role should be to provide long-term safe saving opportunities to people with very low monthly contributions. Tax incentives for this class are totally irrelevant.

SURESH TENDULKAR Professor, Delhi School of Economics

TENDULKAR: The problem is one of investment climate. It is a much more important issue than savings. The financial system has the funds, but it can't find borrowers. If we concentrate on the improving investment environment and economic growth, savings will take care of themselves.

DEBROY: The thrust of this budget goes against the philosophy of the Kelkar Committee recommendations on both direct and indirect taxes and also goes against the arguments that were articulated in the Economic Survey only a day before the budget. The Kelkar panel had advocated unification, rationalisation, harmonisation and standardisation of taxes and asked for elimination of exemptions. Though the finance minister said he would revisit tax reform in the next budget which is just seven months away, he went on to introduce new discretions and exemptions. You find it in excise, on corporate income tax, to a lesser extent in personal income tax and even in customs duties. I would argue there is discretion even in service sector taxation. What is so very special about selecting certain sectors and excluding others? And on what basis was the rate of service tax raised from 8 to 10 per cent?

JAIRAM: The country will have a value-added tax (vat) starting from April 1, 2005. In Parliament almost everybody, cutting across party lines, thinks vat is going to be anti-consumer and anti-trader and it is going to lead to harassment. Yet there is consensus among economists that it is a critical element of tax reform. What explains the dichotomy?

ROY: If India has to be a common market there should be uniformity in the taxation. But introducing a common vat as a substitute to state sales tax is slightly tricky because right now definitions for value-added vary from state to state. There has to be a uniformity otherwise there will be endless number of litigations. The international experience is that wherever vat has been introduced it has brought down the costs and benefited industry.

KIRIT PARIKH Member, Planning Commission

PARIKH: vat will certainly benefit consumers by cutting the transaction costs. Why is then there the fear that it is a harassment tax? It is because vat is a kind of sales tax that is not easily avoidable. A lot of people who were avoiding sales tax in the past suddenly find that under vat they won't be able to evade. That may seem like harassment.

Is 7-8 per cent economic growth
POSSIBLE?
Budget alone cannot ensure a high rate of growth. But economists were disappointed that finance minister set ambitious targets without disclosing a strategy for achieving them.

DEBROY: One shouldn't expect the entire growth impetus to come from the budget. Having said that, I think the growth projections given in the Budget are somewhat unrealistic. There are certain things in the Budget that could hinder growth. One of them is the hike in the service sector tax rate from 8 to 10 per cent.

TENDULKAR: A 7-8 per cent growth in GDP is not possible without 10 per cent growth in industry. Where is that going to come from? I would have liked more incentives for investment. I am amazed at the 40 per cent projected increase in the corporate income tax in 2004-5. If these growth rates are not met, how will the ambitious deficit reduction targets be achieved? It seems the finance minister has put his money only on agriculture assuming that if agriculture grows, everything else would also grow. But agriculture is less than one-third of India's GDP.

SIDHARTHA ROY Chief Economist, Tata Group

ROY: Right now industry is growing at about 7 per cent. Investment has just started picking up. If something positive can't be done, at least nothing negative should be done that could discourage investment. Import of capital equipment could have been allowed at a lower duty to help industry which is in investment mode. The imposition of 2 per cent cess could raise the effective customs duty (20 per cent customs duty plus 19 per cent countervailing duty) on capital goods import by 1 percentage point.

RAJARAMAN: There has been a 2 percentage point fall in the tax-GDP ratio (ratio of total tax revenues to the gross domestic product) compared to 1989-90 as a result of the reduction in customs revenue. We have not been able to make good this loss. There has been a corresponding decline in public investment. That has been far more devastating for the industrial sector than any kind of investment or tax concessions could possibly have been. Whenever we think of incentives or duty reductions we do have to remember the need for public expenditure on infrastructure.