For starters
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For starters

Before anything else, India has to bridge its infrastructure chasm to achieve growth targets.

india Updated: Feb 27, 2006 03:07 IST

I have been involved in a CII-World Economic Forum scenario building exercise for India 2025 in which the best scenario, eminently plausible and feasible, is named Pahle India. In Pahle India, GDP growth over two decades averages more than 9 per cent and generates sufficient employment for poverty to come down to less than 5 per cent. The scenario echoes the prime minister’s vision of double-digit growth that is both inclusive and sustainable. Budget 2005-06 should be framed and presented in this context.

The erudite FM must outline the contours of a medium-term fiscal policy to achieve the Pahle India vision and locate the Budget firmly within this medium-term fiscal policy. A good budget should be informed with a vision of Pahle India, with immediate objectives defined and policy measures spelt out to achieve this.

For an employment intensive double-digit GDP growth, the manufacturing sector has to grow at above 12 per cent. This too is achievable as endorsed by the National Manufacturing Competitiveness Council in its strategy paper. What can be the measures that will push manufacturing sector growth to grow above 12 per cent and facilitate the transition to mass manufacturing?

The Budget should focus on giving a strong thrust to manufacturing. There is often a temptation for policy makers to choose winners or select sectors which are seen to be more promising for employment and growth. I am not enough of a purist to say that all notions of an industrial policy are sub-optimal.

It’ll be quite acceptable if the Budget provided special incentives through excise exemption and direct tax concessions to sectors such as food processing, natural renewable resources, leather, gems and jewellery and garments — all of which have demonstrated their growth, export and employment potential. This is specially true of the food processing sector which is hugely underdeveloped. This sector offers the prospect of taking labour directly off the farms, adding value to agro-produce, affording higher prices to farmers and helping India emerge as a major agro-exporter. Focus on agriculture and food processing will also mean more resources for rural infrastructure. Specific time-lines and resource allocations here will help achieve targets under Bharat Nirman.

An optimal fiscal policy is one that treats all sectors even-handedly. This also reduces the number of special cases and exemptions. Policy measures of this genre can be implemented to give the required thrust to manufacturing.

Most urgent is the need to address the economy’s infrastructure deficit. The domestic manufacturing sector can’t be expected to become globally competitive without the availability of internationally benchmarked infrastructure and procedure. The FM will do well to announce a target for capital formation in physical infrastructure, place it squarely in comparison to that of China, and spell out the measures to be taken to achieve it. How about keeping 5 per cent of GDP for capital formation in infrastructure as this year’s target?

This will be the clearest signal of the government’s intention to support manufacturing and employment generation, and attract more investment. There are data difficulties, but these are issues at the second or third tier that should not come in the way.

The mantra of public-private partnership has to be invested with relevance. Financial instruments must be designed that will distribute more widely the risk inherent in infrastructure projects. That will encourage private investors.

One straight step is to either abolish the category of ‘priority sectors’ for lending by commercial banks or include physical infrastructure within it. There is no logic of according priority sector status for exports that perennially face infrastructure bottlenecks — at the same time keeping out the infrastructure sector. Rather than hiking trade financing, it is more critical to increase infrastructure investment to boost exports.

The FM can also ask multilateral agencies to make their lending more amenable to joint ownership and management by public and private entities. Finally, the Budget could announce incentives for state governments to prepare feasibility reports, acquire land in advance and ready a shelf of projects to invite private sector participation.

Public-private partnership in technology development and innovation will be greatly helped by providing long-term, say ten years, weighted income tax deduction of 150 per cent to not only in-house R&D expenditure but also to all commissioned R&D. This will strengthen the nexus between the public science and technology capacities and the private sector.

Domestic manufacturing can be bolstered by reducing the cost of, and improving access to, commercial bank credit for small and medium enterprises. These enterprises face

a real cost of capital anywhere between 6 and 10 per cent. Had this been the case anywhere else but India, enterprise would have been terminally stifled. The Budget needs to eliminate all remaining small industry reservations and simultaneously announce measures to reduce the interest burden for small manufacturers, rationalising the collateral system for small and medium enterprises.

Venture capital funds must be further encouraged, especially now that massive value is being generated by start-ups and SMEs. The Budget should announce measures to remove entry barriers, quite formidable at present, for foreign and local venture funds, with sectoral or regional focus.

However, the major determinant of capital costs is the large fiscal deficit which successive governments have tried to control but given up after weak attempts. It defies common sense to expect a banker to spend energy and resources chasing risky income prospects with SMEs, when easy money can be made by investing in government securities. The FM should not only release the pause button on reaching Fiscal Responsibility & Budget Management targets but try and press fast forward to make up for last year’s lag.

The burgeoning GDP growth of over 8 per cent in 2005-06 and the likelihood of over 7 per cent growth in 2006-07 should provide sufficient revenue buoyancy. But populism will have to be resisted to achieve FRBM targets. Experts suggest that the volume of subsidy directed towards the Rural Employment Guarantee Scheme in any average village would suffice to create an equal number of jobs.

Contrary to the perception of jobless growth, there’s a shortage of skilled workers in the manufacturing sector. Despite the seemingly robust private sector supply response, specially in IT and management, the education scene remains dismal. Huge drop-out rates, outdated curricula, dysfunctional controls and licensing (that generate rents and encourage corruption), along with

under-qualified and de-motivated teachers and a near-total breakdown of public sector schooling and college education systems today characterise Indian education. Yet, we have senior officials proudly telling us that the last real initiative taken in education was in Nehru’s time!

Clearly, education and skills are a major constraint on manufacturing growth, employment generation and equity. So the Budget should not only announce a significant increase in education sector outlay, but also provide incentives to all private players who invest in new education and expanding training capacity. India, for the sake of its economic growth and equity, should now make the most liberal offer in education services in the ongoing Doha Round negotiations.

As economists know, to achieve Pahle India, everything that is inter-related needs to be addressed.

The writer is Director & Chief Executive, Indian Council for Research on International Economic Relations (ICRIER)

First Published: Feb 27, 2006 03:07 IST