Don't skirt the issue

Budgets are an annual occasion to present a coherent view of the economy and articulate the government’s economic policies. Overall, during the last three to four years, the economy has seen a period of good growth and low inflation. Such an environment should be used to make the necessary changes, because there is a cushion of growth.

During 2000-05, our economic growth was second only to China. We used to think 5 per cent growth was good. Now we are achieving 7 per cent without much effort and under continuing constraints to growth — like poor infrastructure, especially power, corruption, red tape and inflexible labour markets.

Growth is largely taking place now despite the government. The reforms of the early Nineties have freed the spirits of entrepreneurs, in both the manufacturing and service sectors. Our lower manpower costs, quality of our people and large domestic market are facilitating this process. Global and domestic players are catering to global markets and developing domestic markets for an astounding variety of products and services. Domestic companies now have the scale and, more importantly, the confidence to compete globally and they are buying units abroad to increase their share of global markets.

I believe that this momentum is likely to continue. It would be sensible to facilitate it. Even if that doesn’t happen, we will grow at 6 per cent plus per annum. If we have the necessary wisdom and will in the political and administrative system, it can be easily 8 per cent or even 10 per cent. It is important, though, that the growth is inclusive, i.e. spread geographically and across sectors and income groups.

While the macroeconomic scenario has been reassuring, there are tensions building up in the system. Our imports have been growing faster than our exports for the last three years. Oil price increase is only half the story. We have had a trade deficit of $ 5-8 billion for over 20 years. But this was being made up by software exports and remittances from abroad. Also, growing imports, of capital goods and industrial raw materials, indicate a growing economy. We, however, went into a current account deficit last year when the trade deficit ballooned to $ 36 billion. This year we have a trade deficit of $ 30 billion in only nine months of the year. We may be cushioned by our forex reserves of $ 140 billion, but not for long. We have the ingredients in place for a currency crisis. Given that our stock exchanges are now floating, at least partly, on hot foreign money, it does not take much imagination to conjure the worst scenario. Prudent business maps out risks and acts taking them into account. Perhaps, we would be well served by caution on inflow of ‘hot money’ forex till our trade deficit becomes manageable.

We should also remember that we have a mammoth task before us of increasing employment and living standards. For this, major government-imposed constraints exist. It’s not for nothing that we are rated 116th in the world by the World Bank’s ‘Doing Business’ report, as a place to do business. I am not sure whether the present dispensation, dependent on the Left’s support, can take the necessary difficult decisions. What I am also afraid of is that it may be forced to take decisions that may hurt business and the economy.

On direct taxes, the rates need not be tinkered with. Only the irrational fringe benefit tax (FBT) needs to go. Even if tax rates were to go up by 1 per cent or so, Indian business would willingly accept it, rather than be entangled in a bureaucratic maze. FBT is difficult to justify on grounds of either rationality or equity. Also, depreciation rates need to be restored to 25 per cent, because the pace of technological obsolescence is much higher than before and can only rise. Both these steps have been singularly out of tune with the needs of the times.

I also think that the contemplated removal of tax incentives on longterm savings like PPF by shifting to EET is a retrograde step. We have no social security system. As of now, we don’t even have pension funds. To tax these long-term savings is not only unfair to the elderly but is also likely to prove politically costly. These could perhaps be taxed if withdrawn before the age of 60, for purposes oth er than housing.

Special economic zones are fine and should be created, but existing large, complex manufacturing operations can’t be relocated for transient benefits. Therefore, Export Oriented Units need to be given parity with SEZs.

On indirect taxes, I believe there is no need to reduce import duties further till we provide the required infrastructure and a flexible labour policy. Already, in most cases, import duties are 15 per cent or lower. Any further lowering will impose a handicap on Indian producers whose costs are, as per various studies, 15-20 per cent higher than in other Asian countries due to system-induced deficiencies.

However, the Free Trade Agreements entered into by the NDA and UPA governments with Asean countries will create an inverted duty structure where end products will have lower duties than raw materials, which will be a serious disincentive to manufacturing. Even a single rate of import duty discourages industrialisation and hence technology development and employment. When import duties on consumer goods reach zero per cent in 7-10 years, then we will have a difficult situation to contend with. What will we do then?

Vat has been a positive development. There are clear steps needed to take it forward, such that the indirect tax system imposes lower taxes and is non-cascading. As states realise that Vat provides greater buoyancy through lower tax evasion, they will hopefully get rid of the cascading and obnoxious levies like octroi.

The fiscal situation of the government is not healthy. It is also contemplating large increases in the spending on the National Rural Employment Guarantee Scheme etc. The Left, which seems unwilling to learn from facts or experience, has suggested increase in taxation. I am heartened by Chidambaram’s statement that tax rates will not increase.

For industry, agriculture or service sectors to function efficiently, good infrastructure is essential — physical infrastructure in terms of power, roads, ports, etc. and social infrastructure in terms of an educated, healthy people. Our physical infrastructure, especially power, is grossly inadequate. This is essentially because of policy paralysis and financial constraints created by the application of misguided principles.

The state electricity boards are almost bankrupt because power to the agriculture sector is free or is heavily subsidised and is also being stolen in urban areas on a large scale, with the connivance of their staff. For the last 15 years, we have been skirting the issue. As a consequence, in Maharashtra today, we suffer two-hour power cuts in urban areas and eighthour power cuts in rural areas. Can there be any industrial activity in non-urban areas in such a scenario? Can industry plan expansion?

The least we need to do is to privatise distribution and provide subsidy to farmers, so that profitable investment can be made by even NTPC, let alone the private sector. On paper, the Electricity Act, 2003, is supposed to do this, but we have yet to see any action. In Maharashtra, the government is talking of adequate power by 2012. Till then, what are we to do?

We have to move quickly on the infrastructure front. Privatise, transparently, as much as possible, as far as it does not create monopolies. Also, make public investment where private sector investment is not forthcoming, but hand over operations to a private operator with a track record. The government also needs to reduce the fiscal deficit by disinvestment and privatisation, reducing non-merit subsidies and by downsizing of government. There are a large number of government departments that add little value. The money so saved should be invested in infrastructure.

Spending on health, education and especially rural infrastructure needs to increase. We need to provide easy access to good quality and low-cost services in these areas. A greater say to citizens in the running of these services, especially in rural areas, is needed. Funding to a primary health centre or a school should be linked to feedback from its users on its quality.

The government can choose to do the right thing in the budget or appease. Appeasement does not work at least in the long-run. I hope the finance minister will be allowed to do the right thing. India is on the move and it needs to move faster. The world is not at rest, China least of all.

(The writer is Chairman, Bajaj Auto Ltd)