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A rescue package

The current imperative is to boost the growth rate to at least seven per cent plus, which is both employment-oriented as well as non-inflationary. We list certain factors which could rescue the economy, if the FM takes them into consideration in his budget:

Revive savings: Savings rate as percentage of GDP has undergone a decline from 25.5 per cent in 1995-96 to 22.3 per cent in 1998-99. This can be attributed to factors like: (i) withdrawal of several tax exemptions and concessions (80L, 56EA, 56EB, etc) in the various budgets, thus pruning avenues for savings especially for the household sector; (ii) declining returns on savings due to falling interest rates; (iii) rising tax burden on the corporate sector; (iv) sustained dis-saving by the public sector; (iv) uncertain performance of capital markets and mutual funds.

The potential for savings is strong, thanks to the on-going VRS schemes being implemented by the private and public sectors. The forthcoming budget can take initiatives to create additional saving avenues by reintroducing some of the tax saving schemes that were abolished earlier. Secondly, it is high time the government takes note of the rapid dis-savings on its part and brings out firm measures to curtail its ever burgeoning expenditure. In addition, PSUs should also restructure their finances by targetting assets sweating and/or improving their turnover.

Enlightenment on generation II reforms: There is a widespread fear about privatisation and WTO challenges, which primarily stems from lack of awareness about these issues. This, in turn, is blocking the progress of second generation reforms and, in the bargain, stalling the emergence of a competitive environment. There is, therefore, a dire need to create adequate awareness on the actual impact of these initiatives.
In this context, the significance of a tripartite understanding between the government, industry and trade unions is highly imperative. It is high time the FM takes appropriate steps to set this process in motion. Transformation of the old mindset in favour of a liberal economic model -- which has been adopted even by a socialist country like China -- is a must.

Steps for fiscal correction: While the fiscal deficit target of 5.1 per cent is not likely to be achieved this year, a positive development on the fiscal front is the recent tabling of the Fiscal Responsibility and Budget Management Bill in Parliament. Among other objectives, the bill aims at eliminating the revenue deficit and bringing down the fiscal deficit to 2 per cent of GDP by March 2006.

Admittedly, the above objective is highly laudable, but it would be self-effacing if achieved at the objective of curtailing much needed capital expenditure. It is about time that the FM takes appropriate measures to correct the budgetary arithmetic -- bringing down the rising revenue deficit and hiking the stagnant capital expenditure.

Channelising investments into growth sectors: For sustained growth, investments in physical and social infrastructure are an important prerequisite, and the primary initiative has to come from the government. Although the government has tried to attract private investment, the response so far has been lukewarm in the face of uncertain policies, long gestation period and low returns.

A long-term growth perspective requires that the budget give a clear direction on pruning of government expenditure and diversion of the same to growth enhancing physical and social infrastructure. Undoubtedly, this is a long-term initiative, but the budget can surely make a beginning.

Understanding and promoting the needs of industry: As part of the pre-budgetary exercise, the industrial sector has submitted its charter of demands. However, transparent and clear-cut policies in the budget would go a long way in promoting the interests of industry.

This pivotal sector has often faced the brunt of arbitrary governmental policies. For instance, under the garb of huge rehabilitation costs due to the earthquake, the government has promptly imposed a two per cent levy on IT and corporate tax, which is expected to yield a paltry Rs.1,300 crore. This comes over and above the 10 per cent surcharge imposed in the previous budget and the recent 1 per cent levy on the corporate sector for the Contingency Relief Fund proposed to be set up in the 11th Finance Plan.

Effective rates of taxation for individuals and corporations stand at 35.1 per cent and 39.6 per cent respectively. As a result, taxation has reached the same level it was four years back. As if this was not enough, the PM, who expects the economy to grow at the sustained rate of nine per cent, has warned of a further rise in taxes in the forthcoming budget!

Given the gathering momentum of industrial slowdown, the levy lacks justification. This is all the more glaring when the corporate sector is already contributing to 80 per cent of the total tax revenue. Apparently, the government has not taken into account other alternate avenues like borrowing from the international agencies at concessional rates, raising funds through tax-free Earthquake Relief Bonds and widening the service tax net.

Incidentally, service tax accounts for a paltry 1.5 per cent of total tax revenue although the booming service sector contributes 45 per cent to the GDP. Besides, the government also appears to have ignored tax defaulters, who collectively owe the exchequer a stupendous Rs.62,000 crore. Even if a fraction of this sum was garnered for earthquake relief, the fresh levy could have been avoided.

Employment generation: The post liberalisation era has probably resulted in worsening the unemployment problem on account of: (i) industrial restructuring (including VRS),
(ii) unequal growth in opportunities, i.e. predominant generation of jobs in the new economy sector but the exclusion of agriculture and the unorganised sector.

In this context, the FM can take measures to ensure employment generation via infrastructure promotion as also set in motion the long-term objective of agricultural reforms and diversification to create greater employment opportunities in the non-formal sectors.