Back to growth?

(D. H. Pai Panandiker is the President of RPG Foundation. The views expressed in this column are his own)

By D. H. Pai Panandiker

After the successful election it was expected that the aam admi would be put on the pedestal. It was also expected that, after the slow down, the budget will initiate measures that will jack up growth. None is in sight.

Expenditures on food for BPL families, additional employment to rural workers to supplement their income, on education and public health have been substantially increased.

Outlay on NREGA, for instance, is up144 per cent. Not that this is infructuous. On the contrary, these programs will change the complexion of rural society. But the Rs.1.1 trillion subsidies are questionable.

Expenditure on infrastructure was also vital. This sector has been limping for quite a while. Power shortage, for instance is 12 per cent. Investment on highways has been slow; so also on ports. These deficiencies have to be made good if the economy has to progress rapidly.

The budget does provide larger financial allocation. What is critical is effective implementation. The Finance Minister has endorsed public private partnership as a preferred route. That may work if congenial conditions are created.

As a result of added expenditures the budget has now crossed Rs.10 trillion. That is more than 18 per cent of the GDP and will decidedly influence the course of the economy. Of the total expenditure, Rs.3.2 trillion will be on Plan and Rs.4.7 trillion non-Plan expenditure (excluding interest payments). A better balance was called for.

Had the current expenditures been funded from revenue receipts the budget would have given a good kick to growth. But while expenditures are swelling tax revenues are shrinking.

The only tax that is expected to yield higher revenue is corporate tax. Even that is suspect since the budget makes no provision to facilitate corporate growth. What is missing is reforms.

The only minor concession is the withdrawal of FBT which had caused considerable nuisance. But the increase in MAT from 10 to 15 per cent will certainly pinch.

For, MAT is relevant to companies which are undertaking investment to avail of the benefit from supporting incentives. With the increase in MAT almost every incentive will be washed off.

Private sector investment which has been the weakness in the current economic situation will fail to pick up.

The greater worry is that budget leaves an uncovered deficit of 6.8 per cent. That gap will be funded from borrowings and will result in over-crowding of the market and raise the rate of interest.

It is important therefore that the RBI monetizes public debt and pumps in enough liquidity to neutralize the impact of increased Government borrowing.

What is likely to be the impact of the budget on the economy? Industrial production will increase at about 5 per cent. Negative inflation will be corrected in the first week of July and prices over the year will increase 3-4 per cent.

Exports will be static since the world economy still continues to be in recession. Even if monsoons continue to behave GDP growth will be not be more than 7 per cent.

(You can e-mail Dinker H. Pai Panandiker at: dpanandiker@hotmail.com)