Subir Gokarn: Opportunity taken

SECTOR VIEW

Circumstances can be oppressive and controlling; or, they can be liberating and empowering. In years past, the macroeconomic condition of the country has exerted enormous pressure on the finance minister to use the Budget and the announcements surrounding it as a way to manage crisis. Not that that was always a bad thing; 1991 proved that crisis also provided opportunities.

But, permanent fire-fighting is hardly the way to get good policy in place. You sometimes require a healthy state of affairs to make positive changes that are both effective and enduring.

The current state of the economy provided the finance minister just such an opportunity. He has clearly taken advantage of it in formulating his Budget. Relatively rapid growth and the revenue buoyancy that comes with it have been used to satisfy three potentially contradictory constituencies. On the one hand, there has been enhanced commitment to the social and rural sectors and significant initiatives on infrastructure have been announced.

On the other, customs duties have been reduced, while the revenue and fiscal deficit numbers have been brought back on track with the FRBM roadmap. This is the power of circumstance.

The social sector and rural initiatives not only hand out more money, which is not always a good thing, but do it in combination with what appear to be significant institutional improvements. There is an explicit transition from the "project" mode to the "programme" mode, which allows for the inter-linkages and complementarities between multiple activities to be more efficiently co-ordinated and exploited. While it is easy to be cynical and say that this will not help, the bottom line is that it cannot hurt and may actually contribute to better implementation and delivery.

On the broader infrastructure front, the National Highways Authority of India (NHAI), which is implementing the highway development programme, seen by many people to have hit a roadblock under this government, is to be revamped and allowed a wider spectrum of resources to help it implement the programme better. But, the most significant initiative in this area is not backed by money.

The finance minister has recognised that the process of implementation of the value-added tax (VAT), which used an empowered committee of state ministers as its main instrument, can work in the power sector as well. He indicated that such a process would begin soon. To my mind, in sectors such as power, in which states have to co-operate fully with the central blueprint to create a genuine national market, this is the best way to move forward. I would have liked to see some fiscal carrots and sticks for states to make commitments to reform, so I am a little disappointed that this initiative was not taken far enough. However, it clearly is a huge step towards solving the power problem. In any event, there is no point in providing incentives for investment in mega power projects if the power cannot be transported across state lines without barriers.

The reduction in tariff fulfils the long-standing promise to converge to ASEAN rates, broadly interpreted as being within the 8-12 per cent range. For the most part, we are now already there. This does not mean that the net level of protection has decreased, though; some additional countervailing duties with the legitimate purpose of offsetting the burden of state and local taxes have been introduced. But, on the whole, the move is clearly reformist. Over time, lower duties should help to contain inflationary pressures, which, in turn, should allay widening concerns about overheating. The Reserve Bank of India is, then, less likely to push up interest rates, which, as we all know, have been a critical driver of the recent growth momentum and will continue to be so.

The moderation of interest rate increases could also come from two other sources. One, foreign investors have been allowed to participate in the domestic debt market, which should see increased liquidity in the market. Two, the fiscal deficit number is quite realistic, in the sense that it is consistent with rather conservative GDP growth expectations. There should not be any major unanticipated borrowing requirements by the government to destabilise the market.

There will always be some negatives in any Budget, of course. I would like to emphasise two. One, despite having a blueprint ahead of the Budget to rationalise the duty structure on petroleum products, the Budget did not go far enough in implementing it. Hopefully, this is a process that will continue beyond the Budget, to move the country to a more efficient pricing environment for these products.

The other, which is more of a niggle than a complaint, is the composition of revenue growth indicated in the Budget. Excise duties are expected to grow by a measly 6.3 per cent, despite the minister's assurances that leakages by way of exemptions would be stemmed. By the same token, corporate taxes, accounting for almost 30 per cent of the tax kitty, are expected to grow by over 28 per cent, in a year in which it is unlikely that profitability will sustain the very rapid growth of the last couple of years. Overall, the net-to-centre revenue growth is expected to be about 19 per cent, which isn't too unrealistic. However, the skew suggests a slight risk of shortfall if the components with more ambitious targets do not deliver.

But, barring these, this is a Budget that makes very good use of the macroeconomic conditions to satisfy multiple constituencies. It cannot hurt the growth momentum and will, in all likelihood, help it along. The underlying assumptions are, by and large, quite reasonable and realistic. This just goes to show that good macroeconomics allows good economics to be good politics; there doesn't have to always be a trade-off between the two. Speaking of politics, I couldn't help but notice that the four tea-growing states are all going to have elections this year, virtually ensuring that the tea industry would receive some favourable attention!

(Subir Gokarn is chief economist, Crisil)