Reversal in economy is likely

 Reversal in economy is likely

FM has paid lot of lip services to rural development without concrete announcement of policies, says Gopal k  Agarwal

The Government has turned out to be a damp squib. The Congress and the Left, earlier highly critical of the economic policies of the NDA Government, were expected to give a clear direction to the country's economy. The UPA Government inherited a healthy economy with very strong fundamentals, burgeoning foreign exchange reserves, a economic growth of eight per cent, fiscal deficit and inflation under control and a booming stock market. All these were the result of the sound economic policies pursued by the NDA Government. Everybody expected the Congress and the Left Front to implement their distinct policy statements in this Budget. However, the ideological differences in the economic thinking between the two does not leave any room for economic innovation. This has come out very clearly in the criticism of the Budget by the Left Front.

First, in his Budget speech. Finance Minister P Chidambaram paid a lot of lip services to rural development without concrete announcement of policies. Almost all the policies of the NDA Government are being continued. Instead of providing support to the smallscale sector. 85 items have been dereserved.

Second, Mr Chidambaram has spoken so much of education and has imposed a cess of two per cent across the board on all taxes, but he has not spelled out as to how this fund would be spent. Will this amount be in addition to the amount earmarked for education earlier? In our bureaucratic setup, implementation of policies has always been a problem. If the Government does not specify how the benefit will be delivered to the actual beneficiaries, all the good intentions will not bear fruit.

Third, Mr Chidambaram has announced that a consortium of private banks will give loans to the tune of Rs 40,000 crore for infrastructure development. Announcements regarding intentions of the private banks will have no meaning as these will be commercial decisions, and its credit cannot be taken in the Budget. Fourth, in the field of water conservation, Mr Chidambaram's announcement that wells, ponds, etc.. will be repaired and renovated is also an eyewash as this will be done over a period of 10 years and that too without any fund allocation.

To meet revenue requirement, Mr Chidambaram has stated that there would be a 40 per cent increase in revenue collection from the corporate sector only without there being any increase in the tax rates. He plans to achieve this through greater and stricter compliance of tax laws which is unrealistic and impractical.

After criticising so much the disinvestment policy of the NDA Government, Mr Chidambaram, in continuing with the disinvestment of NTPC, a profit-making company, has also announced the setting up of a disinvestment commission.

The Left Front's rhetoric of opposing FDI in strategic sectors has been given a raw deal by announcing increase in FDI in all the three strategic sectors of telecommunication, aviation, and insurance. Telecommunication is one sector in which even the US does not allow majority holding to foreign investors.

Tax concessions in income tax on the taxable income of up to Rs 1 lakh is creating confusion. It would have been much better if instead the basic exemption limit of Rs 50,000 was increased. This will create resentment to anybody having even a slightly higher taxable income of more than Rs 1,00,000.

The increase in service tax by 25 per cent of the earlier level of (eight to 10 per cent) will also have an inflationary effect. Service tax has a cascading effect and the Government needs to control inflation to control fiscal deficit, which is already showing signs of increase. Further, increase in excise tax on steel will also be inflationary as it is a basic metal for infrastructure development. and will harm the housing sector too. The imposition of the anretisonable transaction tax on all securities transactions came as a big blow to the securities market. It seems the Government has not applied its mind as to whether this can be absorbed or will it completely kill the capital and bond market. Transaction tax is bad as every transaction does not lead to profit. Second, 80 per cent of the stock market turnover is through either arbitrage business or jobbing transactions at a very meagre price difference of as low as five paisa. This will lead to complete erosion of liquidity in the market which is very essential for true and fair price discovery and for reducing impact cost (that is, the effect of bulk purchase order on the price of a scrip).

The low interest regime of the NDA Government, which was a ma- jor factor in facilitating industrial development, housing sector, etc., is showing signs of reversal as interest rates are firming up. If the UPA Government does not take major initiatives, which are missing in the Budget, then we may soon see reversal in the country's economy.

(The writer is member, Central Economic Cell, BJP)