Commentary/Dilip Thakore
Chidambaram has made a good beginning
Given that Finance Minister P Chidambaram was presenting the national
Budget on behalf of a first-ever coalition federal government
of 14 political parties (whose economics and business literacy
ranges from plus 20 to minus 200), his maiden Budget presented
to Parliament on July 22, is a masterpiece of sound economic and
political management.
Everybody who knows anything about contemporary Indian politics
knows that Chidambaram is one of the nation's great economic liberalisers
and deregulators. If the Indian economy was salvaged from the
brink of disaster in 1991 when the nation's foreign exchange reserves
were down to $2.2 billion and the country was poised to default
on its foreign debt, the credit for transforming a bankruptcy
threat into a national opportunity must be accorded to three front
line individuals: former prime minister Narasimha Rao, former
finance minister Manmoham Singh and Chidambaram who served with
distinction as the commerce minister in the Narasimha Rao administration.
To his lasting credit, Rao gave the latter two technocrats a carte
blanche to jettison the Congress party's useless socialist
baggage and open up the closed, autarkic Indian economy to foreign
investment, trade and domestic competition.
The rest is history. With its long-suppressed energies released
with the abolition of the industrial licensing system, the Indian
economy, which in 1991 was tottering on the brink of bankruptcy
began registering year-on-year real GDP growth rates topping 5.5
per cent - a sharp contrast to the so-called Hindu rate of growth
(3.5 per cent) which it had averaged for four decades until the
mid-Eighties. And as the latest Economic Survey tabled in Parliament
on the eve of the union budget confirms "overall economic
growth of GDP at factor cost after rising to 6.3 per cent in 1994-95
accelerated further to 7 per cent in 1995-96."
There is no doubt that despite the corruption scandals which have
persistently dogged it, the Narasimha Rao administration has steered
the Indian economy onto the high growth path. Therefore as a committed
liberaliser, Chidambaram's first priority was to ensure that these
never-before rates of GDP growth are sustained. Because no matter
what Left economists who dominate academia and the media say to
the contrary, every committed liberaliser knows that sustained
economic growth is the prerequisite of social justice rather than
the other way round.
The Union budget of 1996-97 therefore is primarily a continuation
of the proven 'creeping liberalisation' of the Narasimha-Manmohan
era. The much-maligned surcharge on corporate income tax has been
halved to 7.5 per cent; maximum import duties have been reduced
to 40 per cent for all other than consumer goods imports which
alas, continue to be prohibited; some relief has been provided
to the salaried class in the first tax bracket and the process
of piece-meal privatisation of the nation's white elephant public
sector enterprises is being continued. Minor excise duty cuts
on toothpaste and polyester yearn endows Chidambaram's maiden
budget with the characteristics of a soft budget which has some
sops for all sections of society.
Given that his first priority is to sustain the never-before rates
of GDP growth Chidambaram has appropriately focused his attention
on infrastructure growth and development. The soft underbelly
of the Indian economy is the overwhelmingly government-owned and
managed infrastructure which is buckling under the strain of supporting
a 7 per cent annual GDP rate of growth. In terms of electricity
supply, railway wagons availability, telecom and road networks
and port facilities, the Indian economy is grossly mismanaged
and creaking at the seams.
Chidambaram's response to this challenge is the promotion of the
(public sector) Infrastructure Development Finance Company with
an authorised share capital of Rs 50 billion. The budget makes
provision for a Rs 5 billion initial contribution of the federal
government which is to be matched by the Reserve Bank of India.
"Among other things, the IDFC will act as a direct lender,
refinancing institution and as a provider of financial guarantees.
I believe that IDFC will induce investors, both Indian and foreign,
to make available long term funds at the lowest possible market
rates," said Chidambaram, in his Budget presentation speech.
Of course despite its inevitable staffing and other problems,
the proposed IDFC will have a marginal utility value. But right
now what the economy needs is not another public sector institution,
but a set of simple and transparent laws and rules which will
attract international construction industry majors such as Bechtel,
Mitsubishi, Daewoo and others to undertake (in collaboration with
domestic private sector companies) massive infrastructure building
projects utilising their entire arsenal of contemporary technologies
in India. In the short run massive foreign monetary and technology
investment in infrastructure development offers the only hope
of sustaining the high economic growth rates of the Nineties.
While the promotion of the IDFC and formulation of simple and
transparent laws and rules for foreign investment in infrastructure
projects are not mutually exclusive, one hopes that Chidambaram
appreciates the limitations of government-owned public sector
corporations which at best are big, lazy and doomed fish in the
small-pond Indian economy.
However, there is an architecture and attention to fundamentals
in the Budget for 1996-97 which is its distinguishing characteristic.
Chidambaram seems aware that if infrastructure development is
a prerequisite of industrial growth, higher rates of growth in
the rural sector is the prerequisite of economic growth. Despite
the high 7 per cent GDP growth rate in fiscal 1995-96, agriculture
output was barely 1 per cent higher than in the previous year.
While this lopsided GDP growth reflects that for the first time
that high GDP growth need not be monsoon-driven, it is reflective
of low national productivity given that almost 70 per cent of
the population is employed in the agricultural economy.
The Budget addresses this problem of low agriculture sector growth.
The share capital of the National Bank for Agriculture and Rural
Development has been doubled with a budgetary provision of Rs
1 billion with a further commitment of Rs 5 billion from the RBI.
In addition a sizeable allocation of Rs 20.5 billion has been
made to the NABARD managed Rural Infrastructure Development Fund
"which provides loans to state governments for completion
of projects like medium and minor irrigation, soil conservation
and watershed management". Moreover in recognition that water
management is the key to agricultural growth, the Budget also
provides Rs 8 billion to a new Accelerated Irrigation Benefit
Programme "under which the Centre will provide on a matching
basis additional assistance from the federal government by way
of loans to the states for the timely completion of selected large
irrigation and multipurpose projects.
Which is all very well. But the problem with these higher allocations
to government owned and managed banks and departments is that
it's been done many times before to little avail. Under the centrally
planned socialist development model huge allocations of national
savings have been consistently made for many worthy causes with
little to show for it. According to the per capita income and
development indices of the international term lending institutions,
India has shown little progress since the Fifties. Moral of the
story: government is the problem not the solution. One would have
expected Chidambaram to be aware of this contemporary Indian reality.
Nevertheless, making allowances for this blind-spot of all of
post-Independence India's finance ministers, the other heartening
feature of the 1996-97 Budget is that it squarely addresses the
problem of poverty alleviation in the four bottom deciles of the
population. An allocation of Rs 2.44 billion has been made by
way of central assistance to state governments to initiate and
complete welfare schemes for the poor. These centrally sponsored
schemes include "100 per cent coverage of provision of safe
drinking water; 100 per cent coverage of primary health centres;
universalisation of primary education; public housing assistance
to all shelterless families; extension of the mid-day meal scheme;
road connectivity to all villages and habitations; and streamlining
the public distribution system targeted at families below the
poverty line".
All unexceptionable and long overdue objectives. But the nagging
question won't go away. Will the incorrigibly corrupt and discredited
administrations of the state governments utilise these allocations
for the beneficiaries of these schemes? With Bihar's fodder and
PWD scams fresh in my mind, I can almost hear 20 million babus
chortling with glee and rubbing their hands in anticipation.
Poverty alleviation apart, the latest budget is silent about the
other great issue of the five year old liberalisation era: privatisation.
Chidambaram has budgeted receipts of Rs 50 billion from the sale
of equity shares of public sector enterprises. Given the high
visibility of communists within the United Front government, he
couldn't have done more. No doubt he is biding his time to build
a national consensus on privatisation.
But if the UF government is still in office in New Delhi and not
in the dustbin of history next February, Chidambaram is likely
to find that he won't be able to put off the privatisation issue
for much longer. For the simple reason that the national consensus
on infrastructure development and poverty and illiteracy alleviation
can meaningfully be funded only by massive privatisation.
Indeed the arithmetic of budget leaves any finance minister committed
to poverty alleviation and infrastructure development little option
but to privatise the asset rich (but income poor) public sector
enterprises. Against its aggregate tax and non-tax revenue of
Rs 1.3 trillion, the federal government spends Rs 600 billion
by way of interest on past borrowings; Rs 270 billion for defense;
Rs 200 billion for administration and an estimated Rs 150 billion
by way of subsidies. This leaves very little surplus for welfare
and development schemes.
On the other hand the asset and market value of the federal government's
public sector enterprises, which yield a miserly 3 per cent annual
return on investment, is an estimated Rs 5 trillion. If these
white elephant PSEs are auctioned on a global basis they could
release the resources required to retire a sizeable proportion
of the federal government's massive debt and finance a national
drive to build enough primary schools to make the nation wholly
literate (sine qua non) within the next decade.
In formulating his well-balanced political Budget for 1996-97
Chidambaram has made a good beginning. But the big question is
whether he - and the UF government - have the stuffing to grasp
the painful privatisation nettle and provide the nation it's long
awaited deliverance from stupefying poverty which is the consequence
of five decades of wasted opportunities.
I wouldn't bet on it.
Dilip Thakore is the founder-editor of Business India and
Business World and former eidtor of Debonair.
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