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Last Updated: Tuesday, 28 February 2006, 13:01 GMT
Do India's budget sums make sense?


By Paranjoy Guha Thakurta
India economic analyst, Delhi

India's finance minister has unveiled a new budget, and says he is aiming for growth rates of 10% a year. But is that realistic?
Indian Finance Minister Palaniappan Chidambaram
Mr Chidambaram - will his budget really help the poor?

India's economy is on a roll. Gross domestic product is expected to increase by over 8%, stock market indices are booming like never before and savings and investment rates are at record levels of 30% of GDP.

Whatever happened to the poverty and unemployment associated with India?

Well, these problems haven't exactly disappeared. The country's social and physical infrastructure facilities are inadequate and creaking.

And the government is straining to implement an ambitious employment guarantee programme in rural areas.

On Tuesday morning, presenting the third budget of the centre-left United Progressive Alliance coalition government, Harvard-educated Finance Minister Palaniappan Chidambaram proudly proclaimed: "There is an investment boom in the country... it appears that India is catching up with the high investment rates of East Asia and China."

For the second time in the nearly six-decade-long history of independent India, its economy would have grown by over 7% for three years in a row.

The annual Economic Survey presented on Monday pointed out in its very first paragraph that two of the five years the country's GDP went up by 8% or more were in the last three years.

'Outstanding'

Unlike the mid-1990s, when growth rates displayed a cyclical trend, this time round, business expectations are wildly optimistic.

Mr Chidambaram went ahead and upped taxes on India's booming services sector - accounting for more than half the country's GDP - while lowering customs tariffs and excise duties on a range of products, including small cars and soft drinks.

He did not touch personal income tax rates.

Even in cities of concrete and steel that glitter on the surface, a third of the residents live in abject poverty, denied secure jobs, social security and access to basic sanitation facilities and clean drinking water

Describing the budget as "outstanding", Prime Minister Manmohan Singh said "growth was a necessary condition for poverty reduction but not a sufficient condition".

Public finances were required in areas where market forces were inadequate, areas such as basic education, health care and infrastructure development, he said.

Budgets in India tend to be more than bland statements of a nation's balance-sheet and contain political messages and policy statements.

On this occasion as well, the finance minister has spelt out in detail the government's programmes relating to agriculture, irrigation, health care and welfare schemes for women, children and the underprivileged sections of Indian society (scheduled castes and tribes).

Economist Saumitra Chaudhuri, a member of the Prime Minister's Economic Advisory Council, said Mr Chidambaram "has been able to face the main challenge before him, that is, to formulate a budget that supports the climate of economic growth while sticking to the path of fiscal consolidation".

Not keeping pace

But even if GDP is growing at a frenetic pace, the Indian economy continues to be hobbled by structural weaknesses.

Rickshaw driver
Much money aimed at the poor does not reach them

The increase in electricity generation (less than 5%) is not keeping pace with overall economic growth, the oil import bill has gone up by nearly 50%, roads remain potholed and non-existent in many rural areas, ports and airports are jam packed and banks continue to prefer lending to the affluent elite.

During the first nine months of the current financial year that ends in March, the index of six core infrastructure industries (coal, electricity, crude oil, refined petroleum products, steel and cement) grew by 4.5%.

That is a good two percentage points lower than the growth rate in the corresponding period of the previous year.

The point is simply that it would be unrealistic to expect the Indian economy sustain a GDP growth rate of 8% with the infrastructure growing at less than 5%.

While the services sector and manufacturing industry have expanded rapidly, the growth rate of the agricultural sector has been tardy at less than 3%.

There have been reports of thousands of farmers committing suicide because of their inability to repay loans obtained from usurious moneylenders.

Mr Chidambaram and some in the government headed by Mr Singh - often described as the architect of economic liberalization after he relaxed bureaucratic controls in the early-1990s when he was finance minister - want to initiate market-oriented policies.

Mollify

But they are hamstrung by the fact that the ruling coalition in Delhi is dependent on support from four left-wing parties to remain in power.

The communists have opposed the government's attempts to privatise public sector enterprises and the government has had to accede to their wishes.

Sniffer dogs check the budget papers
Sniffer dogs check the budget papers

They parties have repeatedly urged the UPA coalition to stick to a national common minimum programme that was agreed on in June 2004 that seeks to increase government spending on education and health-care, besides anti-poverty and job creating programmes.

The government has tried to mollify the left with higher taxes on share transactions and by increasing certain kinds of corporate taxes.

One out of four Indians, or around 250 million people, lives below the officially defined poverty line and half the population earns an income worth $2 a day or less.

One out of three Indians cannot read and write their own names and close to half of the children who join primary school drop out.

Much of the money spent by the government on development schemes gets diverted by corrupt officials and subsidies meant for the poor do not reach those who need these the most.

At the same time, affluent Indians living in urban areas cities flaunt lifestyles that are comparable to those of the rich in developed countries.

However, even in cities of concrete and steel that glitter on the surface, a third of the residents live in abject poverty, denied secure jobs, social security and access to basic sanitation facilities and clean drinking water.

The challenge to alleviate the lot of India's poor remains unfulfilled.




SEE ALSO:
Indian budget pushes for growth
28 Feb 06 |  Business
India's poor seek budget relief
27 Feb 06 |  Business
Indian shares hit historic high
06 Feb 06 |  Business
Inflation fears hit Indian rates
24 Jan 06 |  Business


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