Manmohan's bag of magical budgeting tricks

The finance minister's targets for restructuring -- lower fiscal deficit, stronger economic recovery and higher exports -- form the core of his latest budget.

 
Last Updated: Sunday 07 June 2015 | 21:11:47 PM

Manmohan's bag of magical budgeting tricks

(left) With full convertibilit (Credit: Graphs & Charts: Amar Sharma<s)"THE SENSE of crisis is behind us," proclaimed Manmohan Singh, presenting the annual Union budget -- his third -- in Parliament. The clarion call of confidence with which Singh put forth his intention to liberalise and globalise the Indian economy confounded both supporters and detractors.

Indeed, the finance minister seemed to conjure up the impossible: not only did he offer concessions worth Rs 4,522 crore through changes in customs and excise duties, he also increased planned expenditure by more than one-third of what it was in 1992-93. It was as if the infamous resource crunch, blamed by experts and laypersons as the bane of the Indian economy, was non-existent.

In his budget address, Singh explained the increased expenditure was made possible by "working ceaselessly to overcome the very difficult economic situation that we inherited" -- not missing once again the opportunity to remind one and all that the economy in June 1991, when he took office, was a mess.

Singh assured Parliament he intends to continue the recovery into the next year through "priorities for economic policy at this critical stage of economic restructuring": reduction of fiscal deficits, conversion of the "hesitant economic recovery" to a strong revival and exports as a "high-priority national endeavour".

Many expert observers already see the success of Singh's policies. Veteran journalist Prem Shankar Jha, an economic policy advisor to political parties, says liberalisation and fiscal discipline have enabled Singh to fashion a budget so it combines "large-scale increases in expenditure on the poor, even as we develop strengths to compete with the global economy".

Others who rate the new budget highly stress the 62 per cent increase in capital outlay next year for rural development. They assert the 20-30 per cent reduction in customs duties on most industrial products -- especially capital goods -- will insert high quality as a permanent feature of the Indian economy.

But critics differ with Singh on all counts. Satish Jain of Jawaharlal Nehru University in Delhi argues the claims of financial discipline "conveniently overlook the fact that borrowings -- both internal and external -- continue to be an important source of capital for the government." In fact, says Jain, "This budget is actually an exercise in profligacy, as it depends crucially on a 15-per cent increase in public borrowing by the government, from Rs 5,300 crore in 1992-93 to Rs 6,000 crore."

Surendra Mohan, a Janata Dal MP with socialist leanings, contends most of the reductions in excise duties are on items produced for the rich. Reducing excise duty on these items, he says, will give the government less money to spend on welfare programmes for the poor. This is evidenced, Mohan contends, from the drastic drop in food and fertiliser subsidies.

Environmentalists are apprehensive that increased production of industrial goods will be at the cost of the environment. When shown explicit "environmental provisions" in the 1993-94 budget and asked if this was not proof of Singh's ecological concern, Kanchan Chopra of the Institute of Economic Growth in Delhi emphasised the need "to see where the overall strategy of globalisation and liberalisation of the economy is leading the country's environment.

Others predict the new budget will cause a rash spurt in the energy consumption of the rich and corresponding increases in middle-class demands for electric appliances. Jyoti Parikh of the Indira Gandhi Institute of Development Research in Bombay, argued that with 10 per cent of the population consuming about 90 per cent of available energy, even a small accrual in their energy demand would result in a heavy overload.

UNEVEN INCREASES
Changes in outlays in 1993-94 budget from 1992-93 budget (in percentage)
Total expenditure
(Plan and non-plan)
+5.28%
Plan expenditure
(Central and state outlays)
+11.5%
Central outlay +32.08%
Source: Union Budget

 

THE LAO OF LUXURY
Excise revenue from middle-class consumption (Rs crore)
Year ACs & Fridges Motor Cars Colour TVs & VCRs
  Estimated Actual Estimated Actual Estimated Actual
1991-92
1992-93
1993-94
305.42
339.77
275.00
270.67
266.10
-
699
800
750
778.64
702.17
-
263.43
264.00
225.00
232.2
215.6
-
Source: Union Budget



Boosting industry will tax resources base

Budgetary provisions aimed at giving a fillip to industry, will add to the burden on the country's resources.

CONSUMER-led growth that the finance minister is pushing in the new budget is arousing fears of an intolerable burden on natural resources through provisions such as allowing cheaper exports of iron ore and granite and promoting industrialisation in Himalayan states and deep-sea islands by offering a five-year tax holiday.

The withdrawal of the export duty on unpolished granite and iron ore received a mixed reaction in the Union ministry of mines. Some officials see the levy withdrawals as an unhealthy sign of "allowing an outflow of crude minerals without value addition" and of "a licence to harm the environment".

Divakar Dev, joint secretary in the mining ministry, contends, "The new mining policy has provided for adequate environmental safeguards" and K P S Nyati of the Confederation of Indian Industries (CII) adds, "The budget will make coal-mining projects and equipment cheaper. On the one hand, this means more investment in this sector; on the other, it means coal-mining projects will have funds for environmental protection."

Boosting industry will tax resources base

K P S Nyati: The budget will m Proposals to promote industrialisation in ecologically fragile but genetically rich areas such as the Himalayan states and the island territories have drawn equal flak from both environmentalists and environment and forest ministry officials, who say they will take the issue up with the Planning Commission. The five-year tax holiday lure for industrial investment applies to industrially backward areas such as the northeastern states, Jammu and Kashmir, Goa, Lakshadweep and the Andaman and Nicobar islands.

The apprehension is that this measure could encourage industries that are harmful to the environment. A senior MEF official warns, "If the government is serious about national and international commitments, this provision should not be pushed.

"But industry spokespersons point out that adequate environmental safeguards already exist under the acts relating to forest conservation and environment protection. And Nyati of CII assures, "Industry in these states will take advantage of the assimilative ability of the local environments."

But most environmentalists are unsure whether the carrot that the budget holds out to industry to encourage investing in pollution control equipment, will have any impact. The budget offers 100 per cent depreciation to all investment in pollution control equipment to encourage industry to install pollution control equipment. But how can it be ensured that the industries will operate the equipment?

Says S K Gupta of Envirotech Instruments, which manufactures pollution control equipment, "The enforcement system in the country is still too weak to make an impact." Jaswant Singh of the Bharatiya Janata Party, agrees and adds, "Pollution control boards in the states just do not work."

CII's Nyati explained, "The effect of this measure will be felt most in the power and mining sectors. Tax benefits should also be available for equipment for waste abatement and resource recovery."

An MEF official went one step further, saying, "It is not good enough to give incentives for cleaning up the mess. It is the energy and production efficiency of the technology that should get concessions and incentives."

Uncertainty also exists over the impact of fiscal measures proposed in the budget on forest resources. The budget offers fiscal incentives for forest protection by reducing the excise duty on plywood from 34.5 per cent to 20 per cent.

Inspector general of forests A K Mukherji supports using non-conventional woods because they are a renewable resource. Says Mukherji, "We need a certain proportion of land under total protection for biodiversity conservation. The rest of the forest area can be harvested sustainably."

MORE FUNDS FOR MEF
Annual outlay for Union ministry of environment & forests
(Rs crore)
Departments 1991-92 1992-93 1993-94
(estimated)
Forestry and wildlife 188.41 192.01 198.69
Prevention and control of pollution 74.25 86.21 101.45
Source: Union Budget


DECLINING SHARE
Share of duties on capital goods imports as a percentage of total import duties.
Year %
1990-91
1991-92
1992-93
24.2
21.8
19.5
Source: Union Budget

Budgetary provisions are export oriented

Jyoti Parikh: Which Indian app "IMPORT for export" is the call of Manmohan Singh's newest budget. The duty on project imports in many areas, including mining, power and petroleum refining, has been cut to 25 per cent and to encourage technical upgradation of the capital goods sector, it has been lowered to 35 per cent.

But critics warn making imports more attractive in the capital goods sector could lead to a fall in domestic investment and research and cause a "deindustrialisation" of India's core sector. Says Prabhat Patnaik, professor of economics at Jawaharlal Nehru University in Delhi, "Investors would rather put their money in areas where returns are quicker."

The budget gives incentives particularly to the electronics and software industries, which have export potential. However, the overall duty structure has not been rationalised in keeping with industry's demands.

Manmohan Singh's measures to boost exports also have environmental implications because import duty reductions could lead to overfishing, water pollution and adverse land use.

The finance minister allocates numerous incentives for private-sector funding of indigenous research in government institutes and universities. Says R Narasimha, director of the National Aeronautical Laboratory in Bangalore, "I welcome these measures, especially as the government's own investment in R&D, as a percentage of the gross national product, has decreased."

But Narasimha warns, "Because private industry is operating in a protected seller's market, there has been little incentive for it to upgrade technology. Traditionally, it has depended on obsolete foreign technology." Another factor was noted by scientist S Ramashesha, "Industry is interested in quick results and often the consultancy projects they need require low-level research."

The budget revives both tax deduction on industry donations to approved universities and institutes of technology and management and on investment in research programmes in approved national laboratories and institutions. Both these provisions were in effect until the mid-1980s when they were withdrawn by then finance minister V P Singh on the ground that "industry was cheating." Explained H R Bhojwani, a CSIR director, "It was found the provision for encouraging in-house R&D remained only on paper and it was being used as a tax avoidance gimmick."

But R V Kanoria of Kanoria Chemicals and Industries Ltd, which has an in-house research facility, points out, "Just because a few industrialists did misuse the earlier incentives, it does not follow that everybody, including those who had genuine in-house R&D programmes, should be penalised. The current incentive is a step in the right direction."

Bhojwani contends the earlier incentives ran aground because of bureaucratic delays.

Another issue that has to be resolved concerns intellectual property rights. Currently, the patent for any research conducted in Council of Scientific and Industrial Research confirms the budget will encourage import of more efficient technologies. "As energy has become a major component of production costs," he explained, "this would give an incentive to obtain such technology."

S & T ALLOCATIONS
Major outlays (in Rs crore)
Dept/ Organisation 1991-92 1992-93 1993-94 Percentage
of total
Atomic energy 1279.06 1095.2 1206.56 31
Space 457.45 510 718.05 18
Electronics 121.10 88.50 124.08 3
Non-conventional energy 128.85 128.95 204.22 5
Biotechnology 64.03 77.97 88.10 2
Science and Technology 251.34 282.46 337.35 9
Scientific and industrial research/ Council of Scientific and Industrial Research 258.08 227.60 315.15 8
Ocean development 39.83 48.17 56.41 1.5
Indian Council of Agricultural Research 328.60 372.05 426.90 11
Indian Council of Medical Research 46.97 52.74 56.30 1.5
Ministry of environment and forests (for Zoological and Botanical surveys of India) 297.21 329.37 369.81 10
Total 3272.52 3213.01 3902.93

100

Percentage difference -1.82 +21.47
Source: Union Budget


Poverty alleviation: investment or mere sop?

After successive reductions, can increased allocations for rural development, agriculture, education and health be effective?

BUDGETARY allocations for social sectors delineate the "human face" of the new economic policy, according to finance minister Manmohan Singh. Enhanced outlays for agriculture, rural development, education and health -- after successive reductions in recent budgets -- are expected to silence critics of liberalisation who allege the burden of structural readjustment will be particularly painful for the poor.

The outlay for rural development has gone up by 62 per cent to Rs 5,010 crore, while that for Jawahar Rozgar Yojana has been raised from Rs 2,046 crore to Rs 3,306 crore, with the aim of creating 1,100 million persondays work. "This," says senior economics journalist Prem Shankar Jha, "is an effective intervention in helping the poor in the countryside, though not a complete answer to the problem."

The budget also gets his accolade for providing incentives for growth in the heavy engineering and capital goods sector, which has higher employment generation potential than the chemical industries to which a shift had taken place in the 1980s.

But, Prabhat Patnaik, who teaches economics at Jawaharlal Nehru University in Delhi, disagrees. "The duty reduction in the budget is at the cost of resource devolution to the states, which will adversely affect their agriculture and rural development programmes. Even in this so-called growth budget, the total plan outlay, which includes the Central plan and assistance to states, has gone up by only 11.6 per cent. Taking inflation into account, this is a minor increase."

Ancillary spin-offs
However, Amit Mitra, who heads a pro-liberalisation think-tank, says the questions to consider are whether the budget will stimulate both employment and a better industrial climate. His answer to both questions is affirmative and he adds, "Investment generates spin-offs in all sectors. The critics of the budget forget the ancillary growth that agricultural development led to in Punjab. We must get over this fear that growth will always be at the cost of the poor."

Poverty alleviation: investment or mere sop?

(left) The 1993-94 budget show The provisions in agriculture are equally growth-oriented, says JNU vice chancellor Y K Alagh, who is an agricultural economist. "The most dangerous thing in the rural sector was the drying up of credit flow. This budget has reversed that," he says.

Alagh is most critical of the budgetary provisions for higher education, arguing that it is too soon choke off funding for higher education because it will take time to convince the private sector to finance higher education and until this happens, these institutions would be crippled. But Dinesh Mohan, a professor at the Indian Institute of Technology in Delhi, sees the cuts as "forcing higher education into the clutches of business houses."

Provisions for health care also appear to be inadequate. At Rs 779 crore, the outlay for 1993-94 is only a marginal increase over that of 1992-93. The positive signs, says Amit Sengupta of the Delhi Science Forum, are the lowering of customs duty on bulk drugs, drug intermediates and on components required to produce medical equipment. This could make drugs and medical equipment cheaper. But the cost of health care, says Sengupta, will depend substantially on the drug policy likely to be announced shortly. With liberalisation, drug prices have been going up, not down.

PRIVATE LESSONS
Lower allocations for higher education mean academic institutions will have to seek private sector financing
  (Rs crore)
Year UGC IITs IIMs
1991-92
1992-93
1993-94
401.71
431.44
419.82
111.71
137.80
136.00
17.59
19.10
15.58


The budget's bottom line is that it aims at securing maximum growth while improving welfare measures as much as possible. The finance minister said recently, "I have increased handsomely the provisions for those programmes that would have a direct bearing on the alleviation of poverty." The question on many minds now is whether Manmohan Singh's poverty alleviation plans represent an investment with substance or a mere sop.

Reported by Uday Shankar, Anumita Roychowdhury, Nitya Jacob and Koshy Cherail.

Subscribe to Weekly Newsletter :
We are a voice to you; you have been a support to us. Together we build journalism that is independent, credible and fearless. You can further help us by making a donation. This will mean a lot for our ability to bring you news, perspectives and analysis from the ground so that we can make change together.

Comments are moderated and will be published only after the site moderator’s approval. Please use a genuine email ID and provide your name. Selected comments may also be used in the ‘Letters’ section of the Down To Earth print edition.