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Finance Minister's Budget Speech - Part 1

Speech of Shri Yashwant Sinha

February 28, 2001

PART A

Sir, (G M C Balayoyi, Speaker of the Lok Sabha),

I rise to present the Budget for the year 2001-2002.

2. I do so in all humility. The challenges we face this year are awesome, made more so by the tragedy and devastation caused by the Gujarat earthquake. I hope I shall get the understanding and support of the whole House in my endeavour to meet these challenges.

Economic Context

3. The Indian economy has continued to exhibit both growth and resilience that have characterized its performance in the past few years. Overall economic growth this year is expected to be about 6 per cent despite a series of unexpected setbacks. We have had a second successive year of irregular monsoon resulting in low agricultural growth. World petroleum prices have continued to stay at high levels placing strains on the economy as a whole, and have led to a significant increase in inflation over the past year. Fortunately, despite the increase in energy prices, the prices of essential commodities, and of manufactured products as a whole, have remained stable. Inflation, excluding energy, were around 4 per cent during the year. The economy remained secure with record levels of foreign exchange reserves and public food stocks. The creditable export performance recorded last year improved further: exports grew by over 20 per cent in dollar terms in April-December 2000.

4. It is now 10 years since economic reforms began in 1991. During this period, the economy has grown at an average rate of 6.4 per cent per year since 1992-93 compared to the 5.8 per cent recorded in the 1980s. Poverty has fallen from 36 per cent in 1993-94 to 26 per cent or less now.

5. While economic reforms have placed the country on a much more secure and sustained growth path, we still have some serious concerns and cannot afford to be complacent.

* Agricultural reforms have been inadequate and our agriculture continues to be subject to the vagaries of the monsoon.

* Despite major industrial sector reforms, industrial growth has not accelerated to the double-digit level as expected.

* Inadequate fiscal adjustment has remained the most intractable problem over the past decade.

-- Interest payments now constitute over 69 per cent of the Centre's tax revenues.

-- Subsidies continue to increase to unaffordable levels and do not necessarily reach the deserving beneficiaries.

-- The pension liability of the Government is becoming onerous.

* Public investment in infrastructure and social sectors is inadequate due to falling total public sector savings.

* Private investment is constrained due to high real interest rates and inadequate infrastructure.

Budget Strategy

6. Thus, despite the many achievements of economic reforms over the past decade, much remains to be done if we have to achieve our full potential. There is urgent need to further deepen reforms to set the stage for higher growth over the next decade. We have to intensify our effort in fiscal adjustment so that the generations to come are not burdened by our borrowing excesses. The economy has achieved significant acceleration in growth over the last 20 years. Our aspiration must be to achieve still higher growth in the next 20 years.

7. The broad strategy of the budget, therefore, with this objective of growth in mind is to ensure:

* Speeding up of agricultural sector reforms and better management of the food economy.

*Intensification of infrastructure investment, continued reform in the financial sector and capital markets, and deepening of structural reforms through removal of remaining tiresome controls constraining economic activity.

*Human development through better educational opportunities and programmes of social security.

*Stringent expenditure control of non-productive expenditure, rationalisation of subsidies and improvement in the quality of Government expenditure.

*Acceleration of the privatisation process and restructuring of public enterprises.

*Revenue enhancement through widening of the tax base and administration of a fair and equitable tax regime.

Agriculture and Rural Development

8. As I have noted, reforms in the agriculture sector have been inadequate and must be speeded up. The Government has already announced the first ever National Policy in Agriculture.

9. The provision of adequate credit flow is critical for agricultural production. Total credit flow to agriculture through institutional channels of commercial banks, cooperative banks and regional rural banks is estimated to have reached a level of Rs 51,500 crore this year, an increase of about 15 per cent over last year. It is expected to increase to Rs 64,000 crore in 2001-2002 representing an increase of 24 per cent. In order to ensure continued healthy growth of the agricultural sector, I propose the following steps:

* The operation of the Rural Infrastructure Development Fund (RIDF), set up in 1995-96 with NABARD, has been very successful in upgrading rural infrastructure with about 1,84,000 projects sanctioned so far. To help the States, I have decided to reduce the interest rate charged by NABARD from 11.5 per cent to 10.5 per cent. The corpus of RIDF VII will be increased from Rs 4500 crore to Rs 5000 crore next year.

* The innovation of Kisan Credit Cards has proved to be very successful. Since the year of its introduction in 1998-99, almost 110 lakh of KCCs have been issued. I am asking our banks to accelerate this programme and cover all eligible agricultural farmers within the next 3 years.

* I am also asking the banks to provide a personal insurance package to the KCC holders, as is often done with other credit cards, to cover them against accidental death or permanent disability, up to maximum amount of Rs 50,000 and Rs 25,000 respectively. The premium burden will be shared by the card issuing institutions.

* NABARD and SIDBI were asked to link one lakh Self-Help Groups during the current year. NABARD by itself is well poised to exceed this target by the end of next month. I expect NABARD to link 1 lakh additional Self Help Groups during 2001-02, which would help in providing access to credit to an additional 20 lakh families. Share-croppers and tenant farmers will also become eligible for this scheme and special attention will be given to SC/ST groups. A micro finance development fund has also been set up in NABARD with contribution of Rs 40 crore each by NABARD and RBI.

* I had permitted NABARD to issue capital gains tax exemption bonds last year. This has helped NABARD to mobilise more than Rs 1000 crore at lower than normal interest rates thereby reducing its cost of funds. I propose to continue with this tax exemption.

* The resources from the Watershed Development Fund set up in NABARD would be used to promote people's participation and also enable water users' associations to implement, operate and maintain irrigation schemes.

10. In 1999, I had announced a credit linked subsidy scheme for construction of cold storages for perishable commodities. So far, NABARD and NCDC have provided Rs 161 crore of credit for creation of additional capacity of 9.69 lakh tonnes. A subsidy of Rs 78 crore for setting up cold storage was provided during 2000-2001. I now propose to extend the coverage of this scheme to also cover rural godowns. The subsidy to be provided by the Government would be suitably enhanced to take care of increased coverage. The loans would carry an adequate long-term repayment period and would enable individuals, cooperative societies and others to build godowns by availing of loans from cooperative banks, commercial banks and RRBs.

11. This scheme will enable small farmers to enhance their holding capacity in order to sell their produce at remunerative prices. NABARD proposes to reduce its rate of interest for funding the storage of crops, from 10 per cent to 8.5 per cent. Small farmers will particularly benefit from this scheme by avoiding distress sales.

12. With the diversification and modernisation of agricultural practices, there is a need to augment support and extension services for agriculture. For this purpose, a scheme for setting up Agriclinics and Agribusiness Centres by agricultural graduates will be launched with the support of NABARD. These centres will provide a package of soil and input testing facilities and other consultancy services, They will strengthen transfer of technology and extension services and also provide self-employment opportunities to technically trained persons. Loans on attractive terms for setting up these centres will be provided by banks with refinance from NABARD.

13. There is a significant potential of improving crop productivity in the Eastern and North Eastern regions through crop diversification and adoption of improved technologies. These regions also have large untapped ground water resources. A sum of Rs 61 crore has been provided for the Centrally Sponsored Scheme on "On-Farm Water Management for Increasing Crop Production in Eastern India".

14. I am also happy to inform the House that I have provided Rs 38 crore for the "Technology Mission for Integrated Development of Horticulture in the North-Eastern States," announced by me last year.

Rural Roads

15. In my last Budget, I had announced the launching of a new scheme, the Pradhan Mantri Gramodaya Yojana (PMGY) with the objective of undertaking time bound programmes to fulfill the critical needs of the rural people. As a follow up, particularly with the objective of achieving rural connectivity, the Pradhan Mantri Gram Sadak Yojana has been launched by the Hon'ble Prime Minister on December 25, 2000. A Central allocation of Rs 2500 crore was provided for 2000-01. I am providing another allocation of Rs 2500 crore for the coming year. 50 per cent of the diesel cess is earmarked for development of rural roads.

Rural Electrification

16. It is a matter of concern that even after 50 years of planned development there are still about 80,000 villages, which do not have access to electricity. A package of initiatives is therefore being launched to improve the power distribution system in rural areas. This includes:

* Completion of electrification of bulk of the remaining villages in the next 6 years.

* Extension of assistance to the States for village electrification works under the PMGY whose funding is being augmented.

* Stepping up credit support from Rural Electrification Corporation to SEBs for speedy electrification of Dalit bastis, households of scheduled tribes and other weaker sections of society.

* Improving the quality of power supply in villages, augmentation of distribution networks in rural areas supported by REC under the Accelerated Power Development Programme.

* Earmarking a sum of at least Rs 750 crore out of RIDF for rural electrification works.

* Augmenting the resources of REC, by allowing it to float capital gains tax exemption bonds along with NABARD and NHAI under Section 54 EC of the Income Tax Act.

Management of the Food Economy

17. Increased production and rising productivity makes the proper management of the food economy more critical then ever before. Our policy has to be transformed to deal with surpluses rather than only shortages. The present arrangement of Government of India procuring food grains and States managing the PDS has led to many problems. While the subsidy has increased from Rs 8210 crore at B.E. to Rs 12,125 crore at R E stage this year, the satisfaction level has gone down. I propose, therefore, to give an enlarged role to the State Governments in both procurement and distribution of food grains for PDS in their respective states. Instead of providing subsidised food grains, financial assistance will be provided to the State Governments to enable them to procure and distribute food grains to BPL families at subsidised rates. FCI will continue to procure food grains for maintaining food security reserves and for such State Governments who will assign it this task on their behalf. Details for operationalising these arrangements will be worked out in consultation with the State Governments at the earliest.

18. The agricultural sector continues to be constrained by the existence of a number of inhibiting controls and regulations. The Essential Commodities Act, 1955 provides for the control of production, supply and distribution of certain commodities identified as essential commodities under the Act to protect the interest of consumers. State Governments have issued a large number of Control Orders under this Act inhibiting free movement of some food and agriculture products. In the changed present situation undue restrictions on movement and stocking of food grains and agricultural produce is acting as a disincentive to farmers.

19. Government therefore proposes to review the operation of the Essential Commodities Act, 1955 and remove many of the restrictions that have been imposed on the free inter-State movement of food grains and agricultural produce and also on the storage and stocking of such commodities. It will also review the list of commodities declared as essential under the said Act and bring their number down to the minimum required. My colleague the Food Minister will issue necessary direction in this regard after consultations with the State Governments.

Infrastructure

20. Rapid development of the economy depends on adequate investment in infrastructure. A key issue here is imposition of appropriate user charges necessary to provide adequate returns on investment. Public resources have been invested in the public sector over the last 50 years for the provision of infrastructure services in the country. One consequence of this has been that user charges have inevitably become politically determined. Over time non-merit subsidies inherent in such low user charges have mounted to over 10 per cent of GDP, a figure similar to the total fiscal deficit of the Central and State Governments combined. Hence they are a major cause of the fiscal distress being experienced at all levels.

21. I believe that this issue is now so important that it needs urgent discussion throughout the country. The challenge is to achieve a consensus on the imposition of appropriate user charges in such a manner that the poor are protected while those who can pay are made to do so. Only then will we be able to accelerate investment in these essential services in both the public and private sectors. A prime example of this is the power sector.

Continued

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