BUDGET 2008

The Budget for 2008-09 will be the least taxing (no pun intended!) for the Finance Minister, Mr P. Chidambaram, in several respects and for various reasons. It is the year when the United Progressive Alliance (UPA) Government will be gearing up for the Lok Sabha elections due in 2009. It may even be forced into advancing it to sometime in 2008 itself depending on the outcome of the see-saw that is going on with the Left over the nuclear deal and the results of elections in Himachal Pradesh and Gujarat. The best that Mr Chidambaram would like to do in these circumstances is not to rock the boat or be in the eye of any political storm.
Coasting along agreeably seems actually the best option for him. There is an upbeat mood abroad in the country in macro-economic terms. In fact, things could not be better. Let us start with a broad-brush recital of some of the salient features. Embarrassment of riches
If the present trends in the overall economic performance and management continue, it will not be fanciful to expect the GDP to breeze past the magic double-digit figure of 10. In the first quarter of 2007-08, there has been a heartening growth in all sectors of the economy.
Just to quote a few figures culled at random, the percentage of rise in manufacturing has been 11.9, closely followed by construction (10.7) and services (10.6), covering the entire spectrum of trade, hotels, transport, communications, banking, insurance, real estate and business, community, social and personal services.
Even agriculture, which had been mired in one per cent or less, has had a rebound, registering 3.8 per cent growth. Automobile parts and chemicals and pharmaceuticals have also been doing India proud, consistently forging ahead of the general industrial growth.
This record is matched by India’s showing in merchandise exports. It is not simply that the increase has been a steady 20-25 per cent in dollar terms, but the contents of the exports basket are fast getting diversified, moving away from traditional items such as textiles, gems, jewellery and leather towards engineering goods, automobile parts, chemicals and pharmaceuticals. In this light, the Government’s target of $150 billion for exports in 2008-09 to double India’s share in world exports to 1.5 per cent, seems easily attainable.
There is an embarrassment of riches on the foreign exchange front. The torrent of FDI amounting to $11.4 billion between January and June 2007 is 218 per cent more than the $3.6 billion trickling in during the same period in 2006.
Net capital inflows, which totalled $44.94 billion during 2006-07, are expected to exceed $ 57 billion this fiscal. There is a distinct chance of the reserves vaulting over $300 billion by the time the Finance Minister rises to present the Budget. The gross domestic savings rate, at around 35 per cent, is the highest for any emerging economy. Sound fiscal management
The RBI and the Government in tandem have demonstrated their skill in keeping inflation within check by forging an appropriate balance between the supply of money and the demand for goods. They can be trusted to continue to put in their best efforts to maintain inflation within the prudent limit of 5 per cent that they have laid down for themselves.
Vital signs of fiscal health are also quite pleasing. Buoyed by a 16.31 increase in the collection of direct taxes, the fiscal and revenue deficits in 2007-08 are expected to be not more than 3.3 per cent and 1.5 per cent respectively of the GDP.
The Finance Minister has even talked of wiping out the revenue deficit in 2008-09 and reining in the fiscal deficit in conformity with the goals set by the Fiscal Responsibility and Budget Management Act. The Prime Minister’s Economic Advisory Council (EAC), in its latest report, has patted the Government on the back for “the considerable progress towards fiscal consolidation”.
And well it might! The aggregate fiscal deficit of the Centre and States will be not more than 5.2 per cent of GDP in 2007-08 as against 6.3 per cent in 2006-07, thanks largely to the States complying with the prescribed targets ahead of schedule and even managing to muster a revenue surplus 0.39 per cent of GDP this fiscal. The picture that comes out of putting together all the figures is the supreme confidence and courage, as also the vitality and ingenuity with which India’s economic players have been converting challenges into opportunities. They are acquiring companies, spreading their wings and straddling the world stage with gusto.
Considering this, the exuberance of Sensex pawing like a race-horse to gallop across 30,000 cannot be said to be irrational but befits the description of being only irrepressible. Implementation and maintenance
Thus, the 2008-09 Budget will not make any demands on the undoubted acumen of Mr Chidambaram. The nation has reached the point of saturation with the plethora of schemes already launched under the rubric of Bharat Nirman, and any further addition will be counter-productive.
What is of pivotal importance now is their determined implementation within the allotted resources and time, and the proper maintenance in working order of projects already on the ground. If only the Minister of State for Statistics and Programme Implementation, Mr G. K.Vasan, discharges the onus for this falling on him effectively, two more points would be added to the GDP.
There has been enough juggling and shuffling with the rates and quanta of both direct and indirect taxes. The focus must now shift to strengthening the tax collection machinery and the simplification of the tax laws by taking swift action on the report already submitted by the Study Group appointed by the Government. Soaring government expenditure
The Finance Minister must take to heart the EAC’s warning on the soaring government expenditure. Successive Finance Ministers have found the task of reducing government expenditure akin to climbing a greasy pole. This time too, Mr Chidambaram is up against formidable obstacles to any attempt at enforcing financial discipline. The main culprits, as always, are going to be the outgo on subsidies and the bloated bureaucracy.
The other day, an astronomical amount of Rs 100,000 crore was mentioned by the Prime Minister, Dr Manmohan Singh, himself as the annual unplugged drain on food, fertiliser and fuel subsidies. He wants them pruned so that only the really needy and the poor benefit from them. If making the right noises and going through the motions could have done the trick, there would have been no problem left to solve.
Dr Manmohan Singh, when he was Finance Minister in 1991-96, tried his hand at restructuring them. Mr Chidambaram too, when he was the Finance Minister in 1990, had got a comprehensive action plan prepared for the same purpose. Neither could make any headway, since on both occasions their proposals were promptly shot down by vested interests.
Now that he has the Prime Minister’s stern public mandate for bringing down this burden, Mr Chidambaram will do well to start dialogues with the lobbies opposed to the idea so as to prevail upon them to agree to the pruning process with the forthcoming Budget.Hefty handouts
On the bonanzas for government employees supposed to be under the consideration of the Sixth Pay Commission, the media is indulging in all sorts of wild speculation about their runaway nature. The Central and State Governments are stampeded every time into granting hefty payouts disproportionate to the work put in, and it will not be any different this time.
The Finance Minister should at least see to it that sanctioning of increases is made conditional upon acceptance by staff associations of minimum essential standards and norms of productivity and a phased right-sizing of establishments at the Centre and in the States, taking account of past recommendations of bodies constituted for the purpose.Fiscal Responsibility Index
Finally, considering the onerous obligations imposed upon the Finance Minister by the Fiscal Responsibility and Budgetary Management Act, it is time a suitable Fiscal Responsibility Index (FRI) was devised to measure the extent of adherence to parameters governing the management and utilisation of the huge resources of Central and State Governments.
A beginning can be made with the design of an appropriate matrix already worked out by the Public Expenditure Round Table, a professional and non-political think-tank engaged in promoting an efficient and effective system of public expenditure and greater fiscal responsibility.