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Long-distance runner

The budget bears the imprint of a person who is concerned with restoring high growth and at the same time make it inclusive and sustainable, writes Pulin B Nayak.

india Updated: Feb 28, 2013 23:25 IST

The 2013-14 Union budget has been presented by a man who may be thought of as a long-distance runner in the North Block. The first budget P Chidambaram presented, as a member of the Tamil Manila Congress, was 17 years ago, in 1996-97, and his second budget, presented the following year, was hailed as ‘The Dream Budget’. In the latter, Chidambaram gave evidence of a firm commitment to the reform process, and among other major initiatives, he reduced the top marginal personal income-tax rate from 40% to 30%.

On Thursday, Chidambaram presented the eighth budget of his career. In terms of the number of budget presentations, this is second only to Morarji Desai, who had presented 10. Through the vicissitudes of his own political career and that of the UPA, there is one aspect that seems indisputable: his commitment to the reform process, even in a pre-election year would seem to be unwavering.

For a variety of reasons peculiar to the political economy of India, Union budgets always come with an excessive amount of media hype. A single year’s budget cannot be expected to ‘solve’ the age-old problems of poverty, inflation and unemployment as if with a magic wand. But at the same time the provisions of the budget can well present pointers to the nature of development that the government of the day is charting out.

Judged in this context, the 2013-14 budget seems unmistakably to bear the imprint of a person who is seriously concerned with restoring the high growth path of GDP that we did achieve during years prior to the onset of the world financial crisis of 2008. This year’s GDP growth rate as per the Central Statistical Organisation’s estimates has been as low as 5% and clearly the first obvious goal has to be to restore the growth momentum. And this is precisely what the finance minister has sought to do.

The finance minister was careful to emphasise that the high growth path also has to be inclusive and sustainable. The case for distributive justice in a country with as many as a third of the population below the official poverty line is obviously compelling. Chidambaram has clearly striven to follow his spiritual mentor, the poet-philosopher Saint Thiruvalluvar who had said: “The world is his who does his job with compassion”.

The key to the success of the finance minister’s budget proposals would depend critically on the extent to which he is able to rein in the fiscal deficit, which is proposed to be limited to 4.8% of the GDP. With the slew of expenditure proposals that he has indicated for women, minorities, backward classes and SCs and STs, it would be important to see how far he is able keep within this target.

A key area where Chidambaram deserves kudos is his decision not to have any review of tax slabs. In a situation of tight fiscal stringency, it is often tempting for finance ministers to think in terms of increasing the marginal tax rates. But this often becomes counter productive. A substantial amount of theoretical literature on optimal taxation pioneered by the Nobel laureate James Mirrlees nearly four decades back has unequivocally suggested two significant conclusions: tax rates ought to be moderate and that the base should be as wide as is possible.

There is a tax credit for income up to R5 lakh, which is presumably aimed at giving relief due to inflation. Also, the one-time surcharge of 10% for taxable income above R1 crore would seem to be in accordance with one’s basic moral commitment to equity.

There are, however, a number of serious concerns that need to be considered with care. Industrial growth in the first quarter of 2012-13 was negative, and the expected growth rate in the index of industrial production in the current fiscal year is expected to be barely 3%. Our performance in the export sector has been extremely poor. How precisely a sense of industrial revival may be brought about has to be one of the key priorities for the finance minister.

A serious matter of concern is the dip in gross domestic savings that are now at 30.8% of the GDP in 2011-12, down 6% from 2007-08 when it was 36.8% of the GDP. The gross capital formation has also taken a moderate dip, but more disturbingly, the savings-investment gap has widened.

Perhaps the biggest areas of worry are in the education and health sectors. There is an unmistakable trend that has emerged in recent years, which is that the public sector seems to be withdrawing in both of these vital sectors. The growth of private educational institutions in the higher education sector has come at the cost of an alarming neglect of liberal arts education. In the health sector, public expenditure is a bare 1.3% of GDP, whereas we should at least be thinking of this figure to be in the range of at least 4% to 5%. Private expenditure on health constitutes more than two-thirds of total health expenditure in India. A correction of these trends must form the core concerns of the finance minister in the coming year.

Pulin B Nayak is Professor of Economics at the Delhi School of Economics
The views expressed by the author are personal