Sober reflections

OUTLOOK/ MACRO VIEW

Budget 2007-08 has done little to spur growth.

Clearly, the comments were far longer this year than the Budget itself, which has evoked a mixed response to say the least. First, let us look at the two key segments, and later in the article I will discuss other areas: The revenue arising from growth in manufacturing and services is substantially up and Budget 2007-08 has done little to support these two productive sectors, leaving them to gamble on their own growth through exports and domestic consumption. Not a wise option, considering that they face a possible slowdown in domestic demand with rising interest rates and a slowdown in the US.

So even if markets provide the opportunities to support the assumption for an auto growth option, the supply side constraint in manufacturing calls for attention. And this is already the case in the agricultural sector.

Liquidity constraint with offtake growth (30 per cent) exceeding deposit rate growth (20 per cent) by over 10 per cent, rising domestic interest rate, infrastructure inefficiencies and its high costs. To add to this formidable list, shortages of skilled manpower and the increased hiring and retention costs is beginning to rear its ugly head as well. Well, the list of problems could go on and would also include the high property prices and the current account deficit (sans NRI money) that is close to 5 per cent of GDP.

The biggest miss is on infrastructure for industry and services. This has been estimated at $300 billion over the next five years, amounting to $60 billion every year. Without this, the auto mode development is going to be crippled. No roadmap, master plan and investments have been presented, though each sector is labouring through its issues in wanting to emulate the success of the telecom sector. Import duties have been reduced and there will be more competition from imports.

In view of all these, the Budget this time needed to address overheating and consolidation of growth in manufacturing and services; not increase inflationary doleouts in social schemes, which are anyway plagued by governance issues. No one can deny that we need to ensure health and basic education, however, pumping more money into a system that is known for gross inefficiency is questionable.

No account has been presented about the 2 per cent education cess collected so far over two years and its outcome and yet another one per cent has been added! Also, there's no mention about the five new AIIMS or additional IITs that were announced last year.

In fact, reforms too have taken a back seat. Government's expenditure on itself has increased considerably, a fact hidden under the fiscal compliance number. Expenditure on account of subsidies has increased; government continues to borrow money to pay increasing interest costs. Disinvestment is on the back burner, reversal of government's policy by introducing MAT on exempt companies, are all moves that leave a lot to be desired.

The instruments for raising revenues remain the same and include measures such as cess, surcharge, FBT, special levies, MAT, octroi, electricity duty, etc., among other. These obviously leave little scope for reforms and simplification this time. If time has come for IT companies and EOUS to start paying MAT in advance of the sunset clause, then surely it is time for some rethinking on the issue of taxing the income from rich farmers.

Finally, in my view, more attention was needed in supporting the productive sectors before throwing away additional good money in inefficient social welfare schemes without the supporting innovative reforms for tangible improvement in the governance issues that continue to plague the public delivery system.

The author is advisor, Crisil, Zydus Group and his views are personal