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Stray notes in the Budget symphony

The rich get subsidies in numerous hidden ways, in response to lobbying that goes on behind the scene all the time. It is good that the anticipation of elections is one time that the poor make some gains, writes Kaushik Basu.
None | By Kaushik Basu
UPDATED ON APR 02, 2008 07:02 PM IST

There are few economic events as overrated as the annual Union Budget. Over the years this has come to acquire the status of major sporting event in India. When a prominent radio station woke me up early in the morning to ask my views about the Indian Budget, I had to confess that I had slept at night, when the Budget was presented in India. But as it happens, there was enough in this year’s Budget to wake one up with a start.

The Union Budget 2008 announced a loan waiver for poor farmers that is the largest debt forgiveness programme ever in India and among the largest waivers in the world. Taking off from the R. Radhakrishna committee report but going further, the Finance Minister announced a write-off of all loans taken by poor and marginal farmers from scheduled commercial banks up to 31 March 2007. And for other farmers he announced a one-time settlement by which farmers would be excused 25 per cent of their debt. Together these will add to an expenditure of Rs.60,000 crores or $ 15 billion. It is a testimony to India’s fiscal buoyancy that the government is able to give such a large handout.

From the reaction of the stock market to comments from economists, it is clear that many have reacted negatively to this announcement. When you add to this the fact that millions of families will benefit from the rural employment guarantee scheme, several million children from mid-day meals and there will be a big step up in the number of mothers and children who will benefit from other child development programmes, you should be able to guess, even if you know nothing about India’s electoral cycle, that an election is imminent. These are populist moves meant to woo an electorate. And my reaction to them is: thank goodness for such populism. The rich get subsidies in numerous hidden ways, in response to lobbying that goes on behind the scene all the time. It is good that the anticipation of elections is one time that the poor make some gains.

It is true that in principle there are better ways of reaching the poor, and the waiver of debts can raise anticipation of future waivers and distort behaviour. Nevertheless, being a kind of negative income tax, this is relatively non-distortionary, and in these times of growing inequality and farmer suicides, a desirable move.

There are other moves that deserve praise, such as the small rise in the short-term capital gains tax. There was also good news about the economy that the Finance Minister conveyed in his speech, the most striking being the fact that India’s investment as percentage of GDP this year will be over 36 per cent (this is an estimate of the Economic Advisory Council to the Prime Minister). This is an astonishing achievement that reinforces the belief that India can realistically target a 10 per cent per annum growth. Of course, there will be fluctuations around this, but as average performance this is well within the nation’s grasp.

The sector that could have done with more attention is agriculture. The Ministry of Agriculture recently advertised that total Indian food grain production in 2007-08 will, at 219 million tonnes, “be an all-time record”. This is repeated in the Budget speech as one of our achievements. However, this is misleading, since for any variable that is generally on an upward trend, virtually every year will be an all-time high. The Indian GDP, for instance, achieved an all-time record each year from 1980 till now (simply by virtue of the fact that growth rate each year was positive). It is not surprising that this year also saw an all-time record production of rice, maize, soya bean, and cotton.

The fact of the matter is that Indian agriculture is doing badly, and those whose livelihood depends on it are suffering. A programme like the rural employment guarantee programme is useful only as a welfare program. It cannot really do much to overall national employment. For that we have to create conditions which enable and encourage the private sector to employ more workers.

The way to tackle the problem is to step up on agricultural investment in a very big way and to boost manufacturing so that more people move out of agriculture to the industrial sector. Policies for boosting manufacturing lie largely beyond the budget and need policy initiatives that go beyond the Ministry of Finance to reforms of our labour laws and a massive step up in the quality and extent of infrastructure. Once the excitement of the Budget dies down it is important to turn our attention to these tasks.

(Kaushik Basu holds the C. Marks Chair and is Director of the Center for Analytic Economics at Cornell University).

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