labels: prem shankar jha, economy - general, union budget 2007
A budget of good intentionsnews
28 February 2007

Budget 2007 is a continuation of the finance minister''s previous years'' efforts to remove the distortions introduced into the taxation system during decades of the command economy and turn it back into an instrument solely for raising revenues for the government. By *Prem Shankar Jha.

Prem Shankar JhaIndians have been so deeply conditioned by decades of the command economy that they still cannot get used to the idea that the best budget is one that changes nothing at all.

So it is hardly surprising that his budget for 2007-8 has drawn a host of criticism — not for what it has done but for all the things that it has not done.

The criticism is far from being justified. Much of it is in any case politically motivated. The Congress has just lost three state elections. This has sent adrenaline coursing through the veins of the opposition, which is consequently spoiling for as fight. But a large number of special interest groups, which have, literally never had it so good, had been lulled by Mr. Chidambaram'' unfailing courtesy into believing that he was going to make things even better for them. These have not hesitated to voice their disappointment.

The truth is that the current budget is very similar to the one Mr Chidambaram presented last year, and for very much the same two reasons (See: ). The first is his conviction that when an economy is already doing well one should tinker with it as little as possible. The second is that from the start Mr Chidambaram had made it his goal to remove the distortions introduced into the taxation system during decades of the command economy, and turn it back into an instrument solely for raising revenues for the government.

It is difficult to find fault with his approach. The economy is set grow at more than nine percent a year for the second year in a row. The rate of growth of manufacturing has climbed from 8.7 per cent in 2004-5 to 11.3 per cent in 2006-7. Mr. Chidambaram has therefore confined his tax proposals to streamlining the existing tax structure, bringing customs duties closer to South East Asian rates. Instead, he has concentrated upon the expenditure side of the budget, where he has tried to remedying perceived weaknesses in some sectors of the economy.

Among the more important initiatives are a sharp increase in the supply of credit to agriculture; the revival of the agricultural extension service that used to be the backbone of the green revolution; the creation of a training corps that will instruct farmers in adopting better conservation practices, and of an elaborate system for recharging ground water reservoirs by draining rain water into open wells.

Mr. Chidambaram has frankly admitted that investment in the infrastructure has not only fallen catastrophically, but that attempts to increase it through public-private partnership, have made a slow start. The solution he intends to try out in the coming two years is to create a large shelf of investment projects and put them all up for competitive bidding.

In the meantime he has finally taken up the suggestion first made by deputy chairman of the planning commission Montek Singh Ahluwalia, to use a part of India''s foreign exchange reserves to buy the imported component of infrastructure projects. That will give the government an additional source of funds to invest in the infrastructure on its own.

There is, similarly, a welcome emphasis on not just education, but on providing the right type of education.This is reflected in the government''s determination to complete the modernisation of the country''s 1500-plus Industrial Training Institutes. There is also a belated but nonetheless extremely welcome recognition that the government needs to stop treating education solely as an entitlement and start treating it as a privilege to be conferred on the deserving. That is what the hundred thousand merit-based scholarships a year that Mr. Chidambaram has announced will do. This will go a long way towards redressing the imbalances that had crept into education.

Concentrating upon the expenditure side does not mean that Mr. Chidambaram is playing safe. What it means is that he has now got the tax regime very close to where he wants it. This is apparent from the spectacular success of the Value Added Tax. Resisted for years by the state governments, it has proved such a fruitful a source of revenue that the states have not only implemented it but agreed to phase out the central sales tax, to which they had clung so adamantly for the past decade and a half.

Between the decline in the interest charged on state government debt, the rise in the yield of their taxes caused by the switch to the VAT, various debt write-offs and spending economies, there has been a sea change in the finances of a majority of the state governments during the past three years. One wishes that Mr. Chidambaram had devoted more time to telling the Lok Sabha just how great this change has been and what it signifies for the future of the country.

Mr. Chidambaram''s budget does, however suffer from one shortcoming. It has been framed at a time when sections of the economy are overheating and others are suffering from fairly acute cost-push inflation. The Reserve Bank has been bearing down almost brutally on the money supply to curb the former. This has pushed up real interest rates to levels, of seven to eight percent for good borrowers, that the economy last knew seven years ago. There is a real danger that this will cause the present investment boom to peter out a few months hence. That could trigger, once again, the kind of recession the economy experienced in 1995.

However much one may want it not to be so, a budget will always remain to some extent an instrument of policy. Mr. Chidambaram needed to take the country into his confidence and tell it just how he intended to tackle the inflation without impairing the economy''s spectacular growth. But he barely made a reference to inflation and had nothing to say about how he would tackle it without hurting growth. He would reassure the public and foreign and Indian investors greatly if he were to do this during the budget debate.

* The author, a noted analyst and commentator, is a former editor of the Hindustan Times, The Economic Times and The Financial Express, and a former information adviser to the prime minister of India. He is the author of several books including, The Perilous Road to the Market: The Political Economy of Reform in Russia, India and China, and Kashmir 1947: The Origins of a Dispute, and a regular columnist with several leading publications.

(The author''s articles can be read at

also see : A 'don't rock the vote' budget

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A budget of good intentions