Well known economist Dr U Shankar, former director of the Madras School of Economics and the current honorary professor analyses the Budget in this interview to Shobha Warrier.
The corporate sector is unhappy with the Budget. So also the IT sector. The middle class also is complaining. As an economist, how do you assess the Budget?
The IT sector is particularly unhappy because of the Minimum Alternative Tax. But then they have enjoyed tax benefit for a long time, and are making a lot of profit.
The corporate sector is unhappy because the dividend distribution tax has gone up from 12.5 to 15 per cent, which will hurt the sector.
The focus of the Budget this time is on helping agriculture and providing more funds to social sector, healthcare and education. There are some efforts to curb inflation. But I would say it is not a growth oriented Budget.
The finance minister has announced several schemes for the rural sector, most of them just extensions of the old ones. Does that mean that all the schemes that were announced till now have not yielded desired results?
A scheme like recharge of water in the drought prone areas was started 15 years ago and they are still talking about it. They have given different names to the old ones. One way of making these schemes work is by passing them to the local people.
The problem lies in the delivery mechanism. The question is, how can we deliver what is promised in a cost effective way? A lot of questions are being asked about the viability of the national employment scheme, identification of the people, the type of jobs offered, etc.
Indian industry feels if there was public-private partnership in the rural schemes, you can achieve results.
Ideally, partnership with the private sector and NGOs will work better. But the problem is with the bureaucracy and the government. They would like to keep everything under their control. They are not even willing to transfer them to the local people.
As an economist, are you impressed with the number of schemes announced in the Budget for the rural India?
See, as the economy grows, the share of agriculture has to come down. It is like this: when your income doubles, the proportion of money spent on food decreases and you start spending more on comforts and luxuries. That is why in many countries like the USA, Japan, etc, the share of agriculture is only 4-5 per cent. But the problem concerning India is that agriculture accounts for 18 per cent of the output but accounts for only 50 per cent of employment. That means the average earnings of an agricultural worker is far lower than the average earnings of a man involved in services and manufacturing.
You said the share of agriculture should come down. Has it been coming down in India?
In 1950, in India, share of agriculture was 50 per cent and now it is 18 per cent. In another 20 years, it will come down to around 10 per cent. At the same time, you have to move those involved in agriculture to manufacturing and services. Share of agriculture will fall further.
Agricultural production may go up but the share of agriculture in the total output of the country will come down. You don't need more than 4 per cent of agricultural production in the national economy.
In India we grow mostly cereals. We need more pulses, more vegetables, more fruits, more milk and more egg so that we will have a diversified basket.
You mean another green revolution of a different kind is necessary?
Exactly. You also need high yielding variety of cows. A diversified basket will be much more profitable.
Similarly they have to address some fundamental problems like deterioration in the soil quality and deterioration of ground water table and salinity of water. Water has become scarce. Unfortunately politicians do not want to treat water as a commodity. You have to have to the right charge for water. You can have different tariffs for different seasons and different crops but it is not politically acceptable.
Unfortunately environmental problems always take a backseat in the Budget. Punjab now faces a serious problem of deterioration of soil quality and ground water. It is happening in Tamil Nadu also where water is not even fit for irrigation. Government needs to urgently address these fundamental problems.
Do you feel the finance minister should have encouraged the manufacturing sector more?
Manufacturing was a problem five years ago. The rate had slowed down to less than 3 per cent in 2001-02. But in the last few years, the rate of growth has gone up to 9-10 per cent.
There is a difference between China's growth and India's growth. Manufacturing was booming there and they became the manufacturer for the whole world while India concentrated on services.
We are far behind in infrastructure and it is still a big question mark. We are better in telecommunication but far, far behind in power. Transport also is a problem.
Many industrialists were of the opinion that instead of accelerating growth, the finance minister has put a brake on growth by not looking at tax reforms when the growth in revenue is buoyant. Do you feel that way?
Yes, it may have a temporary effect on growth.
I also don't find any compelling reason for raising the dividend tax from 12.5 to 15%.
The finance minister said raising output is the best way to fight inflation. What is there in the budget to raise output?
He has spoken about better management. For example in the case of pulses and oil seeds, he wants to bring in better technology to solve the problem. But the problem is, most of the schemes will have only long-term effect. But he is under pressure to spend more on agriculture. To what extent he will achieve it is doubtful.
Will this budget be inflationary?
You need two things for inflation. One is the monitoring policy. The budget itself says money supply has increased by 21 per cent last year while bank credit was grown around 29 per cent. When you have too much money chasing too few goods, it will increase the general price. To arrest this, Reserve Bank is raising the interest rate so that there is less cash in the market.
The other is the supply side management. Price control is actually very bad because it may lead to corruption, hoarding etc. Then, there will not be any incentive for producers to produce more.
The best solution to fight inflation is by increasing output. As a short-term measure, you can do that by importing, and that is what he is going to do in the case of edible oil. Other short-term measure is stop exports.
While the finance minister spoke about improving housing in the urban sector, how can it be achieved when cement price may make construction costly?
Cement price has already been rising very fast. Apart from edible oil, pulses and rice, it is the price of cement that is going up. The FM has said that there will be tax relief for those who will sell cement at Rs. 190 or less.
But whether it will work or not, we have to wait and see. What the chairman of a cement company said was, whatever it is, the price of cement will rise. It will affect all construction work; roads, buildings, houses, dams; every construction activity will be affected.
Do you call this a populist Budget?
No, it is not a populist Budget. At the most we can say, it is on expected lines.
In 1991, indirect taxes accounted for the lion's share of government's earnings. Now, direct taxes account for 48.9 per cent, which is a good thing because indirect taxes affect everybody while you pay direct taxes only if your income is high. Generally as a fiscal policy, direct tax is better than indirect tax. When you have heavy indirect tax, price goes up. To encourage exports, it is better to reduce indirect taxes.
Another thing is, income tax assesses in India are only 23 million - 2.3 crore and our population is 106 crores. By definition, more than 100 crore of the population does not come under the tax net.
As an economist, are you satisfied with the Budget?
I would have preferred more money on infrastructure, which is needed if they want to sustain the growth. Unless infrastructure bottlenecks are taken care of, manufacturing cannot be sustained. Their ambitious plan of increasing exports will suffer if infrastructure problems are not taken care of.
I am also dissatisfied with the way the power sector has been neglected. Even 9 per cent growth is possible only if the government gives proper attention to the infrastructure.
Overall, I would say the Budget is satisfactory.
Photograph: Sreeram Selvaraj