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Monday, Dec 19, 2005


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Mid-Year Review of Economy — Important emphasis on infrastructure

S. Venkitaramanan

The Mid-Year Review mandated by the FRBM Act serves a useful purpose in alerting the Government of the fiscal and economic performance so far. Above all, it re-emphasises the importance of infrastructure, both for industry and agriculture. Hopefully, the focus on fiscal performance targets will not affect the Government's determination to spend more on infrastructure, which should not be sacrificed at the altar of fiscal targets, says S. Venkitaramanan.

THE FRBM (Fiscal Responsibility and Budgetary Management) Act mandates that the Government place before Parliament a periodic review of progress made in achieving the goals and targets set in the Budget for the year.

Considering the number of progress reports he has to process, the Finance Minister, Mr P. Chidambaram, must be feeling like a hard-pressed student in our educational system, who has to face a variety of similar tests in quick succession, and feeling the strain of too frequent monitoring. Much of the success rides on international economic developments, such as crude oil prices, which can impact budgetary performance.

The latest progress report prepared by the Finance Minister relates to the Mid-Year Review of the Economy for the year 2005-06. On macroeconomic trends, Mr Chidambaram has been modest in his estimate of the expected rate of GDP growth. He has set the figure at 7 per cent, although responsible experts have estimated higher rates.

The macroeconomic picture, however, appears robust. The review places the external accounts in the correct perspective, especially on prospects for the rupee. While the rupee has appreciated with reference to some currencies, it has not with reference to some others.

These changes have to be understood in the light of the trade-weighted real exchange rate (REER). This is within the range of tolerance. Whether this view will be shared by Indian exporters, and the manufacturers who compete with exporters, is a matter of doubt.

The performance in respect of the Government's financial record, its revenues and expenditures should be the centre of attention in the Mid-Year Review, keeping in view the main mandate of the FRBM Act. The performance in respect of these targets of fiscal deficit and revenue deficit, in particular, has not been according to the script laid out in the Budget for 2005-06.

The performance targets laid down in the FRBM Act are (i) non-debt receipts not to be less than 40 per cent of BE, (ii) fiscal deficit not to be higher than 45 per cent of BE and (iii) revenue deficit not to be higher than 45 per cent of BE. These targets have not been met.

The Mid-Year Review attempts an explanation of the difference between 2004 and 2005 as being due to adjustment of debt swaps — the latter being prepayment of Central Government loans by States in 2004 — being accounted for as one-off non-debt receipts the previous year.

What is important, however, is that the targets set for this have not been met.

The Mid-Year Review provides a detailed analysis of the trend of revenue receipts compared to Budget Estimates. Gross tax collections during the first half of the current year grew 21.9 per cent over the corresponding period last year. They amounted to 37.2 per cent of the Budget Estimate of the current year, compared to 35.5 per cent in the corresponding previous period.

Incidentally, the Fringe Benefit Tax fetched Rs 822 crore — an insignificant proportion of the gross tax collections of Rs 1,37,000 crore garnered during the half year. Truly can it be said of the fringe benefit tax that never was so much trouble taken for so little "benefit", except the ideological satisfaction of the idea's progenitors — just a fringe benefit for some who help make the Budget.

The Securities Transaction Tax has fetched Rs 1,031 crore, and the Cash Transactions Tax Rs 89 crore. Too little to justify the expectations at the time of imposition! They are more irritants than revenue measures.

Turning to the main taxes, personal income-tax as a whole registered a modest growth of 10.6 per cent in the half-year under review. Corporate taxes, however, grew at 28.5 per cent. Increased imports led to Customs duties growing at 24 per cent despite a reduction in peak duties on non-agricultural products from 20 per cent to 15 per cent.

Service taxes grew at a record rate of 66.8 per cent compared to an estimated 23 per cent budgeted for the year as a whole, reflecting the growth in the services sector.

Excise collections were, however, sluggish in spite of impressive growth rates in the manufacturing sector. The Review ascribes this to the larger share of growth in exempted sector industries. The explanations — and the exemptions — need to be reviewed.

Non-tax revenues in 2005-06 were lower than in the corresponding period of 2004-05. The figures shown in a table in the report's Appendix do not reveal the break-up of how much the decline is attributed to oil PSUs being affected by Government's populist decision on petro-products prices. Nor does the Review give a detailed break-up of receipts from various sources, such as the RBI's profits.

In regard to interest receipts, the Review says the debt swap scheme resulted in a lower outgo of interest from States to the Centre. But the figures in the detailed table show that the interest rate of the Centre actually increased in the half year, from Rs 12,448 crore in 2004-05 to Rs 14,778 crore in 2005-06. Perhaps, there was increase in receipts on interest from PSUs on loans for extra-budgetary support.

The Review assesses the progress in monitoring the effort of spreading expenditure over the year to prevent bunching of outlays with their inevitable consequences on efficiency of fund use. The Centre's focus on better cash management is obvious from the fact that it has a comfortable cash position with the central bank. In fact, it has had a surplus. The efficacy of expenditures on the ground is, however, a different matter.

The Review has a significant reference to the infrastructure sector. While it notes that infrastructure bottlenecks account for slackness in other investments, particularly manufacturing, it points out that India's spending on infrastructure has been just 3.5 per cent of GDP compared to 10.6 per cent in China.

While the Review emphasises public-private partnerships, it does not mention the need to ensure an environment conducive to such investments. Public-private partnerships require a stable and profitable structure of returns to investments, which, in turn, require that the Government's policy ensures that public utilities are not prevented from charging what it costs them to provide the services, subject to what the market can bear.

The mess in the power and petroleum sectors, with their mass of subsidies, shows the distance we have to travel to make investments really attractive to investors and other stakeholders.

While the scope of the review has been broadened to cover macro-economic developments, it inevitably involves an emphasis on the Government's successes in regard to disbursement of agricultural credit in micro-finance.

Insofar as credit to agricultural sector is concerned, actual disbursements by September 2005 were equivalent to 59 per cent of the target for the full year and, seen against of the previous year, 56 per cent above the performance — a creditable achievement.

In the first half of the year, the Review claims that 35 lakh new farmers were financed by the banking system. Higher credit to the farm sector is, indeed, important. But, in the same way as the `Outcome Budget' is being compiled for the outlays by the Government, it is necessary to undertake a review of the effect of credit disbursal on farm outlays. The Government would be well advised to initiate, through Nabard, a sample survey on this subject.

The review devotes specific attention to restoration of water bodies as part of the programme for agricultural reconstruction. It states that a pilot project is envisaged in nine States to cover nearly 700 water bodies with 20,000 hectares of additional bodies to be brought under irrigation.

So far as actual performance is concerned, the review blandly mentions that the States have been asked to firm up specific targets and identify annual targets for implementation. It is pertinent to mention that half the Budget year is over and the start of the project seems to be too late already. The outcome of the proposed water bodies project may not be very bright considering the slackness in the start itself.

The Review serves a useful purpose in alerting the Government at various stages of the fiscal and economic performance so far. Above all, it performs a worthwhile role in re-emphasising the importance of infrastructure, both for industry and agriculture. Hopefully, the focus on fiscal performance targets per se will not adversely influence the Government's determination to spend more on infrastructure. It is essential that infrastructure not be sacrificed at the altar of fiscal targets.

Interestingly, the Review adopts a cautiously optimistic stance on growth targets. Obviously, much depends on how the weather gods behave. But the Government has to play its part, and China's experience, in particular, shows that governments in developing societies do play a very important role.

Hopefully, by the time the Budget date arrives, the growth indicators will be even more positive than they are now. Here is wishing the Finance Ministry and the economy the best of luck.

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