Commentary/Mani Shankar Aiyar

The Budget will go for a six, if there is any stumbling on the agriculture front

Sengupta quantifies the disaster-in-making in respect of infrastructure. He says that whereas power requires a minimum state investment (additional to what the finance minister has proposed) of some Rs 15-20 billion, state investment is also needed on a much larger scale for "surface transport" (a fancy name for roads and bridges) and construction.

He stresses that to "push growth" we need to "increase public investments (to) stimulate effective demand, which is badly needed in view of recessionary conditions in industry." This is in accord with Manmohan Singh's prescription in the Nehru lecture that "public investment in irrigation and power has to be encouraged." Please note Singh's accent on "public investment..." That merely by opening power to the private and multinational sectors, the state cannot abnegate its duty to provide infrastructure.

Sengupta, like Union Agriculture Minister Chaturanan Mishra of the Communist Party of India, deplores Chidambaram's step-motherly treatment towards agriculture. Far from heeding Manmohan's call for vastly increased public investment in agriculture, Sengupta points out that, "In agriculture, the increase in the Budget this year is marginal, and spread in small amounts over a number of sectors, unable to make much impact."

This is ironic because the only reason the finance minister was able to save face over his government's dismal economic performance in 1996-97 was because of the agricultural sector's outstanding performance. (Which was made possible because of an outstanding monsoon.) If for reasons of weather or Chidambaram's tight-fistedness when it comes to humble farmers, we see any stumbling in 1997-98 on the agriculture front, all the Budget's other figures will go for a six.

Sengupta points out "the most important factor that can push up growth in the private sector is a reduction in the real rate of interest." He has hit the nail on the head: interest rates, not taxes, are what is holding back investment in private sector industry. And as Sengupta dolefully acknowledges, "Policies of the Reserve Bank have failed to make much of a dent on interest rates, despite our commercial banks being flush with liquidity for the past two or three months."

What Sengupta has not added is if real interest rates were really to descend to reasonable levels, the inflow of NRI hot money would dry up and we would be in a balance-of-payment soup. It was only Singh who was able to fine-tune interest rate movements with such finesse that NRI inflows reached record levels even as industrial growth rates soared.

Sengupta is highly sceptical of "the theology that a reduction in corporate tax and income tax would be sufficient to expand output and investment." Without such expansion, there is no way lower tax rates will keep government revenues buoyant. He adds, "the assumption about larger compliance due to reduction in tax rates is highly questionable," especially as the success of the voluntary disclosure scheme "depends very much on non-harassment of tax-evaders."

Chidambaram impaled on the horns of a dilemma of his own making is not a pretty sight. And, of course, if his revenue assumptions are wrong -- and I see no way they can be right -- we all of us are going to be in a pretty pickle before long.

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