Not Feel Good, Not Feel Bad...

...between the two extremes, this is the "feel relieved" Budget. That was the broad consensus of the Board of India Today Economists on Budget 2006, which was a mix of progress and political compromise.

PICTURE SPEAK

THINKING CAPS: (From left) Debroy, Gokarn and Rajaraman

Some confusion over the impact of the budget is to be expected in the times as these. With three consecutive years of 7-8 per cent growth, the economy is, in many ways, racing ahead of the Government. The job of the finance minister is to make sure that he is not just witnessing the spectacle of high growth but also contributing to it. He can do that by supporting all drivers of growth-demand, investment, savings and sentiments. Did Chidambaram do that on February 28?

To understand the rather hard to describe budget and know what it really means for the economy and the common man, India Today called a meeting of the Board of India Today Economists (BITE). The six-member economic policy think-tank of the India Today Group-that has economists who have been in the thick of budget making in the North Block for a decade, economists who diagnose budget proposals in microscopic details and those who keep a tap on how finance ministry proposals are received in the corporate boardrooms-debated the budget for over two hours. Here's what BITE made out of the proposals-their impact on income, consumption, demand, investment and growth. But before coming to any of these, let's start with checking what Chidambaram has done to put the Government's financial health in order.

Death of deficit in sight?

The demon of deficit-excess of expenses over income-has haunted every finance minister. Finally Chidambaram seems within shooting range of the beast. And it's high time. According to the time-table set by the Fiscal Responsibility and Budget Management (FRBM) Act, the worst kind of government deficit, revenue deficit, must become zero by 2008-9. That's just two years from now. The finance minister has promised to cut the deficit to 2.1 per cent of the gross domestic product (GDP) in 2006-7, and further reduce it in the years ahead. This commitment has endeared him to many. But not the fiscal policy expert Indira Rajaraman, who is RBI Chair Professor at the National Institute of Public Finance and Policy. She points out two impediments in the targeted fiscal correction.

To remain on course of the targets set by the FRBM, the revenue deficit for 2006-7 should have been fixed at 1.7 per cent of GDP, and not 2.1 per cent. The finance minister can of course claim he will still eliminate deficit by 2008-9, but Rajaraman won't buy into the claim because after 2008 the compulsions to raise public spending will be higher than today, not lower. That's because it will be a year before the general elections. The task of expenditure management will be further complicated by the fact that interest rates have bottomed out and have begun to rise marginally. This will raise the cost of government borrowing. The revenue deficit in 2005-6 is marginally higher than it was in 2004-5. "The finance minister would have been better off taking bigger leaps in deficit cuts this year, rather than leaving it for the last two years of the FRBM schedule", says Rajaraman. Besides, citing its FRBM the Central Government has been telling state governments to bring about a similar legislative discipline on their fiscal management. If Delhi fails to adhere to the targets, it can't demand the same from the states.

INTERVIEW | P. CHIDAMBARAM   Finance Minister P. Chidambaram spoke with Executive Editor  Shankkar Aiyar and   Business Today Editor Sanjoy Narayan on his fifth  budget.

"It is a budget for the Real India" Q. This is not a big bang PC Budget... A. You can't do big bangs every year. The big bang tax reform on the direct taxes was done once in 1997 and again in 2005. Q. What do you say of the muted reaction? Is it disappointing? A. You see the urban, English speaking upper middle class is your reader and viewer. But that's not all of India. This Budget is for the real India and addresses concerns about agriculture and improving infrastructure. It is not headline news, but is necessary to build a strong India. Q. You have been praised for not doing any wrong rather than things that you have done right... A. The question is what is right and what is wrong. The section that is giving you that feedback thinks that the right thing to do is to cut their taxes or give them tax benefits, give them tax concessions. Q. How would you characterise this Budget? Is it continuity, consolidation or coalition economics? A. It's a Budget that bets on growth and lends a helping hand to agriculture. Q. Are you not worried that there is more investment by Indians abroad than by foreign companies in India? A. Both are investments according to me and both are good according to me. If you invest abroad, you are probably exporting goods, you are exporting components or finished goods. I don't agree with your figures though. Q. But foreign direct investment is stuck at $3 billion a year. A. If you count all the three heads of FDI, we are already pretty close to $7 billion or so. We need to attract to more FDI. We are, therefore, making a big push in the power sector, coal sector, telecom sector, shipping, and civil aviation. Q. What about retail? A. In retail, we have made a small opening. That is all our political space allows us to open. Q. But is there consensus even within the Congress on reforms? A. The Congress is a large party and there will be shades of opinion there. But once Congress takes a decision it stands firm. Neither the NCMP nor the Congress manifesto bars opening up of retail chains. But at the Hyderabad AICC meet we were cautioned that we must proceed in a calibrated manner. So calibrating it, we opened up retail to single-brand chains. So we should allow matters to rest there for a while before we try anything else. Q. Your bet on growth, how much of it is consumption-led? A. It is an investment-led growth as well as demand-led growth. Consumption is rising; investment will rise, capacities will be added. Q. Wouldn't higher interest rates slow down consumption? A. Interest rates are hardening not just in India, but elsewhere in the world. But given that, my judgement is that half-a-percent increase in home loan rates is not going to dampen the appetite of people to own homes or goods. Q. You have modified the FBT. Would you at some point want to phase it out? A. The FBT is justified as I said on the principles of equity. There's no country in the world which does not tax perquisites. Q. Is the middle class the milch class ... income tax, service tax and state levies. What about agriculture... even the Left supports taxing it? A. Agriculture can be taxed by states and not the Centre. We would need a constitutional amendment. Let the parties do it in the states first. Q. Are you saying that the Left should do it in West Bengal first? A. I didn't say the Left or CPI(M). I am saying any party which advocates it should do it. Rest assured any move to amend the Constitution will be defeated. Q. How does the Budget address equitable growth? A. It will bring more investment in rural India, accelerated irrigation benefit programme, the rural roads programme, and the RIDF window which has been expanded. Q. But there is a gap between announcements and actual spend. A. It is premature to judge. Let us judge ministries once the performance budget is published. Q. There are concerns that the corporate sector growth is slowing down... A. Manufacturing, in the third quarter of 2004-5, slowed down, and likewise in the third quarter of 2005-6, it slowed down a bit. But the first and second quarters were good, and hopefully the fourth quarter will also be good. Q. Where do you see India in 2009? A. Per capita income is growing but that is only one part of the story. We will hopefully have better roads, a better rail network, better airline connection, less congestion at airports, better institutions of excellence and better hospitals. Q. Are you moving across to South Block? A. The South Block, I think, has two offices, both occupied. And I don't think I have the capacity or the credentials to aspire for those offices.

Bibek Debroy, secretary general, PHDCCI, is also convinced that deficit targets in the coming years aren't going to be met. But that won't worry Subir Gokarn, chief economist with CRISIL, too much. He will accept minor slippages in deficit reductions, if that's for the cause of growth. He is convinced that the budget promotes economic growth with a combination of tax, spending and reforms measures. Some deviation from the path of revenue deficit elimination is a small price to pay for that. Ajit Ranade, chief economist, Aditya Birla Group, would accept overshooting the 2008-9 deadline for zero revenue deficit, if that is specifically because of higher investments spending by the Centre. That is, if outlays are directly for productive outcomes, they needn't be cut to adhere to the deadline.

Do outcomes justify outlays?

Right in the UPA government's first budget, the finance minister had promised to improve the efficiency of government spending by matching outcome with outlays. It was on this promise that the government had launched its big-ticket spending schemes like the National Rural Employment Guarantee (NREG) programme and the Bharat Nirman scheme. The third budget of the government is the right time to check on the delivery of the promise. According to Debroy, the Government's record in improving quality of expenditure has been abysmal. "We have a finance minister who says the best solution to poverty is growth. We have a government that says anti-poverty programmes don't work. Yet we have all these spending programmes that, like the Titanic ship, keep sinking, and we still have more and more of them," he says.

Rajaraman would have liked the government to allow private sector and state governments to access part of funds allocated for schemes like Bharat Nirman to build infrastructure on their own, after agreeing on certain conditions for the use of funds. This would have brought a kind of private-public partnership in funding, and more importantly improved the quality of spending and the speed of delivery of infrastructure planned under Bharat Nirman and other such schemes. She recommends an arrangement whereby for every rupee spent by the government, Rs 5 come from the private sector, and that happens in a way that's profitable to the private investor. Shankar Acharya, professor with ICRIER and former chief economic adviser, sees some control over the growth in spending-the growth in total expenditure of the central government between 2004-5 and 2005-6 was only 2.2 per cent-but isn't sure of the quality of spending. "It has been demonstrated time and again that when it comes to improving education, health and other social infrastructure, the problem is not of funds, but of having right institutions, correct delivery systems and accountability. Yet the UPA Government is primarily interested in putting more money."

Gokarn is more generous. According to him, since Chidambaram cannot possibly shut these schemes, the only alternative is to coordinate them better. That, he believes, is being done because the Government is moving from project approach to programme approach in management of social schemes. This should improve delivery. "We are moving from a state of despair to a state of moderate hope in social spending. There is no guarantee that new delivery systems will work, but they are likely to increase accountability and efficiency" he hopes.

Will the Budget aid the roaring consumption and investment?

Today's rip-roaring economy is propelled by the massive spurt in consumer spending and a record growth in investment. BITE is unanimous that even without budget, investment and consumption will continue to flourish though, as Acharya says, the rate of consumption growth may slow down a bit. But will Chidambaram's proposal harm or hurt these two growth engines? Even the Budget's worst critics count some proposals that should clearly cheer the industry and investors. Reduction in peak rates of customs duty, movement toward a standard excise duty rate of 16 per cent, removal of 118 products from small-scale industries reservation, the promise to move to a unified product and service tax (GST) by 2010 and effort to clamp down on tax exemptions are hailed as progressive steps by Debroy, Rajaraman and Acharya. Rajaraman also believes that Bharat Nirman and NREG plan will deepen and strengthen demand by putting the money into the pockets of rural unemployed.

Siddhartha Roy, chief economist, Tata Group, sees Budget doing nothing to hurt the current consumption boom triggered by rising income, proliferating hire purchase and low inflation. The cuts in duties on small cars, aerated drinks and processed food and minor give-aways in income tax exemptions on certain categories of investment should help consumers spend and save more in the months to come. "At a time when there was pressure to introduce new tax or cess, what the finance minister has been able to achieve is commendable," says Roy. Ranade, who share's Roy's optimism, expects sales and profits of companies to continue to grow at 20 per cent or a higher rate in the coming months. Since sales are proxy to demand, that implies consumption boom will continue.

Sure, just as investment and consumption is taking place despite the government or the Budget, the existing constraints on a further and faster rise in investments will continue despite some grand announcements in the budget on power and roads. An evidence of forgone investment is the rush among cash rich Indian companies to invest overseas. Ranade points out foreign investment by Indian companies in 2005-6 could touch $3.5 billion (about Rs 15,000 crore). Much of this investment did not take place in India because of the high cost and inefficient infrastructure. To set up a new plant, an investor will have to spend up to 20 per cent of the total cost in building basic infrastructure such as roads and captive power plants. No such cost is involved if the plant is to be set up, say, in China. "In today's competitive environment, it is this factor that's making many Indian companies invest in Beijing rather than in Bihar," says Ranade.

Step forward, step backward or stand still?

There was a narrow consensus among the BITE members that all positives and negatives taken into account, Budget 2006 doesn't set our economic lives back in any way. It takes some baby steps forward, and that frustrates some economists. Debroy is dismayed that every silver lining in the Budget has a few dark clouds around it. For instance, while some fundamental tax reforms have been proposed, introduction of discretionary rates and slabs in customs and excise duties could dirty the indirect tax system. So on taxation, the Budget is both a movement forward and a step backward.

Acharya would have liked the finance minister to use this unique and happy coincidence of upturn in both domestic and global economies to do a better consolidation in Government finances. He would have preferred both fringe benefit tax and the cash withdrawal tax to be withdrawn and the rate of corporate income tax to be raised. Chidambaram instead took the half step of tinkering with the FBT. Both Gokarn and Roy expected the Budget to address the issue of petroleum prices. The ministry already has recommendations of the Rangarajan committee on pricing options, but the Budget was silent on it. Roy feels the uncertainty on when and by how much will the prices be raised is a bigger concern than the actual hike itself.

A fear is that instead of using the strong economy to take bold steps, the good conditions have actually breeding inaction-why fix something that isn't broke. Gokarn and Ranade believe that the Budget is the product of its political and economic environments and is not unrealistic. "There is a consistency between the reforms introduced and the targets set," says Gokarn. The most consistent message on the Budget reads something like this: If you can't feel good, don't feel bad either. Feel relieved.

Rohit Saran, Shankkar Aiyar, Puja Mehra and Sushmita Choudhury

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