Union Budget 2006-07

Missing the big picture
By Yashwant Sinha

The economy has been on a high growth path for the past three years. Except for some underlying concerns, this trend is likely to continue.

What is more, confidence level in the Indian economy, within the country and abroad, is very high. The conditions were thus most favourable for the finance minister to present a courageous and path-breaking Budget. Instead, this Budget has turned out to be a non-event. The finance minister has not addressed the underlying concerns in the economy. Inflation has been kept artificially low by not passing on the full impact of petroleum price increase. The Rangarajan Committee recommendations have not been touched in the Budget. The government is merely postponing the day when this will need to be tackled. Maybe they will raise prices when Parliament is not in session, but whenever it happens it is going to add to inflation.

There is already a pressure on interest rates. There is also a liquidity crunch in the economy. This is bad news for the economy as a whole. The single most important factor, which had triggered growth of the economy, was softening of interest rates during NDA rule. Higher interest rates will have an adverse impact on consumer spending, home construction and the economy as a whole. It is, already, affecting the balance sheet of Indian companies.

There are signs already of slowing down of the industrial sector. The index of industrial production is lower this year than last year. In December 2005, it touched a low of 5 per cent growth compared to December 2004. The growth rate of intermediate goods has fallen from 6.9 per cent in April-December last year to 2.2 per cent this year. Infrastructure is a key area of the economy. The finance minister has done precious little for infrastructure in this Budget. In fact, by raising MAT from 7.5 per cent to 10 per cent and abolishing Section 10(23)(g) of the Income Tax Act he has made life more difficult for infrastructure companies.

The concessions to farmers were long overdue. Former Prime Minister Shri Atal Bihari Vajpayee had already announced before the 2004 elections that interest rate for farmers would be reduced to 6 per cent. Therefore, reduction of interest rate on short-term loans to farmers to 7 per cent is welcome but inadequate. I wish the finance minister had recognised contribution of the Kisan Credit Card scheme in augmenting farm credit.

According to the Economic Survey, more than 556 lakh cards had been issued to farmers across the country up to November 30, 2005. The worrisome feature in agriculture, however, is decline in capital formation in agriculture to 1.7 per cent of the GDP in 2004-05 compared to 2 per cent in 2003-04 and 2.2 per cent in 2001-02. It is regrettable that Chidambaram has not thought it fit to implement the farm income insurance scheme, which had been proposed during NDA rule. He could have easily called it Indira Gandhi Farm Income Insurance scheme and implemented it to take full credit for it. As far as rural development is concerned, increase of allocation to from Rs. 21,334 crore to Rs. 24,026 crore in 2005-06 is only a nominal increase in view of the fact that this ministry is responsible for the National Employment Guarantee scheme and most of Bharat Nirman schemes.

Similarly, there is a decline in the allocation for the department of road transport and highways from Rs. 21,886 crore to Rs. 18,378 crore. The allocation for urban employment and poverty alleviation is also less than last year. The Budget does not talk of economic reforms at all. Disinvestment has not been mentioned. Pension reforms have been mentioned only in passing.

The Budget is timid on taxation. There is no new initiative on housing or on savings, though the rate of household saving has actually declined. The finance minister has tinkered with excise duties when he should have gone for a bold step like reducing the mean rate from 16 per cent to a lower figure. Similarly, on the custom duties front, he should have reduced the peak rate by a full 5 per cent instead of the 2.5 per cent that he has announced. The CVD of 4 per cent on import duties, sectoral adjustments like in the case of steel and across the board increase in service tax will have an inflationary impact on the economy. The idea of levying service tax on ATMs is a bad idea. Financial intermediation should not be taxed. Chidambaram should have also completely abolished such harsh taxes as banking cash transaction tax and fringe benefit tax.

The economy is already on autopilot. It has a built-in momentum of its own. Perhaps, we should be grateful that the finance minister has not done any great damage to it with his Budget. But he has certainly missed a golden opportunity to present a Budget, which would have helped make a paradigm shift from 8 per cent to 10 per cent annual growth rate. Alas, he has proved to be a God of small things. There is no big picture in this Budget.

(The writer is a former Union Finance Minister)