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| Feb 28, 2000 | ||
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| ECONOMY Budget 2001 The millennium's first budget shouldn't just be an accounting exercise. It should spell out new ideas for a second generation of reforms and structural adjustments in the economy. By V Shankar Aiyar
Anyway, the past one decade of economic reforms has taken some excitement out of the traditional budget making. The tax reforms -- the most visible part of the budgetary process so far -- have reached a stage where changes in the rates will be minimal. More than two-thirds of government spending is committed and fixed. Even the erstwhile buzzwords like privatisation and downsizing suffer from overuse. What are, however, still open to radical new ideas are the measures needed to make these buzzwords a reality. Ideas to lift the second generation of economic reforms out from the discussion papers to definitive acts of commission. Fortunately, Sinha seems to be aware of the opportunity. Over the past few months, he has unleashed a debate across the country on the need for bold reforms through raising of administered prices and tackling the resistance to those hikes. What's more, he has involved his colleagues -- be it Disinvestment Minister Arun Jaitley, Power Minister P.R. Kumaramangalam or Petroleum Minister Ram Naik -- signalling for the first time that the winds of reforms are now blowing much beyond the corridors of North Block. While it is true that the devil is in the details, the millennium's first budget must at least broadly outline the new thinking emerging in the Government and among political parties. This should extend beyond enacting of the fiscal responsibility bill or the constitution of an expenditure reforms commission. It should cover the entire gamut of economic reforms. In addition to the annual accounting exercise of the Central Government, the budget must set out a roadmap of long-term reforms and structural adjustments. Says Venugopal Dhoot, chairman of Videocon: "The budget should shed the 'copybook' approach and adopt a 'need-of-the-hour' approach." India today presents nine out-of-the-box ideas for the forthcoming budget. Ideas that provide new solutions to old problems. Ideas that suggest unconventional ways of dealing with conventional rigidities. 1.
SPECIFY END
USE OF MPs' ALLOWANCE Every year the government parts with Rs 1,700 crore (or Rs 2 crore per MP) under the local area development scheme. While MPs do find ways to upgrade their constituencies the scheme functions without a clear focus. THE IDEA: Parliament can legislate that MPs must spend at least 25 per cent of their allotted monies on education and 25 per cent on healthcare. The money can be spent on upgrading education in any manner deemed fit -- be it primary schools, a veterinary training institute or a computer training centre. For instance, it costs less than Rs 10 lakh to set up a modest computer institute that can train a minimum of 15 students at a time. So every year, an MP could -- with Rs 50 lakh in his kitty -- set up five such institutes and by the end of his five-year term dot his constituency with 25 such institutes. This would not only help bring about computer literacy but would fetch jobs for both urban and rural educated youth. Similarly, on the health front, the MPs could set up primary health centres across their constituencies. THE IMPACT: Currently, the Government spends a mere Rs 4,407 crore (1.55 per cent of total receipts or 0.22 per cent of the GDP) on general education. This scheme would -- in one shot -- bring in an additional Rs 425 crore for education. Similarly, the Government spends Rs 1,398.36 crore on medical care and public health, which is 0.49 per cent of its revenue or 0.06 per cent of the GDP. The Government's spend on healthcare could go up by Rs 425 crore, or almost 25 per cent over the current level. Also, this would be focused, would have a single implementing authority and would be insured for delivery. 2.
PAY BACK PUBLIC
DEBT THROUGH SALE OF PSUs This year, the Government of India proposes to pay 48.12 paise as interest on its borrowings out of every rupee it earns. As of March 1999, the government's total internal debt was to the tune of Rs 8,20,000 crore (expected to touch Rs 9,34,429 crore this March). In fact, given its liabilities the Government is borrowing to pay interest on past borrowings. Obviously, this leaves little for development unless the Government retires its debt. THE IDEA: Repay debt. Easier said than done? Not really. The Government intends to disinvest its stake in 53 PSUs, partially or wholly. All it needs to do is create a vehicle for amortisation, park the PSUs in a trust and pay back as and when they sell. In other words, the Government will exchange its ownership in these PSUs with public debt -- at least Rs 4,00,000 crore -- when it succeeds in selling its crown jewels. THE IMPACT: Overall reduction in debt, interest costs, interest rates and improved usage of government finances. The Government will be able to save at least Rs 44,000 crore -- or 24 per cent of the current year's receipts -- in just interest costs. This will also reduce the Government's need to borrow -- bringing down interest rates -- and will help free government funds for more critical areas. 3. STOP BEING A
CUSTODIAN OF PUBLIC SAVINGS The government is caught in a conflict between its social face and its fiscal face. Its social face requires it to keep interest rates on public savings at over 10 per cent (since it is tax free the return translates into 13.5 per cent) whereas the fiscal face requires the interest rates to be brought down to more manageable and economic levels in consonance with the level of inflation (the Government can't be borrowing at 11 per cent when inflation is at 3 per cent). THE IDEA: Using the corporate financial idiom, the Government can pair its exposure (Rs 3,28,304 crore) with its assets -- say, the potential value of the PSUs. As in the theme for reducing public debt, the government could use the proceeds of divestment to pay the required return on the savings to start with, and as the kitty grows, ensure that savers (depositors) are paid back their monies and government is out of the business of managing private savings. There should not be any resistance on the part of depositors since the Government is guaranteeing the interest rate. Only it is being done by selling assets. Depositors can also be given the option to pull out if they are not confident about the Government's move and find their own investment avenues. THE IMPACT: To start with, the government -- once it pairs the savings' liabilities with assets -- can slash interest rates (by at least 3 per cent) and level them with the rate of inflation bringing down its own interest costs. This will improve investment, create employment and boost growth. Public savings will find avenues where resources will be managed in a much better fashion. The slashing of interest rates will also put pressure on banks to cut their transaction costs which account for 3-4 per cent of interest costs. 4.
CREATE AN
EDUCATIONAL ENDOWMENT FUND The government currently spends less than 2 per cent of its total receipts on education. A UN study states that nearly half the world's illiterates live in India. Lack of investment in education has (it has been proved beyond doubt) slowed down India. But the problem is even if we agree to the thesis where does one find the funds to increase literacy. THE IDEA: Currently, Section 80 G allows an individual earning, say Rs 10 lakh a year, to donate up to 10 per cent of his income (Rs 1 lakh) to an educational institution to claim tax exemption of up to Rs 50,000. The Government can create an educational endowment fund, allow exemption up to 100 per cent of the sum donated and use the funds specifically via a legislative mandate only on education. THE IMPACT: Upgradation of the education budget. Those who are doing well would not mind forking out larger sums for educational funding if it is accompanied by tax exemptions. The funds thus collected can be used specifically to upgrade the education budget which will pay off in the coming years in terms of growth. In fact, corporates too could be prodded to do their bit. 5.
NURSE THE LAGGARD
STATES BACK TO HEALTH Bihar, Uttar Pradesh and Orissa account for a third of the country's population but grew by merely 1.5 per cent in the '90s as compared to the national average of 8 per cent. The economy can't forge ahead when a third of the country is lagging behind. And propping them would require serious investments into these states. THE IDEA: Devise a programme to push these states ahead first. Given the correlation between investment and governance, the Union Government could perhaps adopt a district each from these states and provide the climate needed. By creating this island of governance the experiment could draw investment, employment and thus growth into a geographically limited area. This would propel the other districts -- just as Andhra Pradesh under Chandrababu Naidu has inspired other states to embrace e-governance -- to adopt efficient systems. THE IMPACT: In the natural course, these states would require new governments and new policies to change the mindset of decades. But that would take time. Instead, if these three states are propelled into action (via a strategic experiment that causes imbalance) it could work as a catalyst towards faster change. In simple statistical terms, doubling the growth rate of these states from 1.5 per cent to 3 per cent would push the national growth from 8 per cent to 10 per cent. Just imagine what would be India's growth rate if and when these states attain a 6 per cent growth rate. 6.
SET UP VIRTUAL
EXPORT PROMOTION ZONE In 1985 India's exports were around $3 billion and China's about $3.5 billion. By 1995, while India's exports shot up to $13.5 billion China's crossed $72 billion, with exports in just toys crossing $14 billion. Reason: India's myopic policy of reserving the value-adding industries for the small scale sector and labour rigidity. THE IDEA: Create a virtual export-promotion zone. One where the reservations for small-scale sector do not apply and where labour laws are relaxed enough for the enterprise to be competitive. In other words, units focusing on exports should be provided leeway both in the kind of enterprise and labour practices. THE IMPACT: India has among the largest pool of trained and skilled manpower which is currently engaged in production that doesn't quite derive value. Setting up of a virtual export-promotion zone will push India out of the peculiar stranglehold where it exports traditional goods to traditional buyers and bring in the moolah by the billions. 7.CORPORATISE DD AND
MERGE WITH VSNL-ISP Talk about the power of the media to draw moolah. Last year, NBC got married to ViaCom to produce a $75-billion screen. Zee mogul Subhash Chandra paid global media tycoon Rupert Murdoch $300 million to buy out Star TV's 50 per cent equity stake in Zee TV. Just last month, America OnLine (AOL) and Time Warner merged to create a $290-billion entity. THE IDEA: Create a one-stop media shop merging Doordarshan with vsnl's Internet service provider THE IMPACT: With Doordarshan's terrestrial reach of 88 per cent, VSNL's 300,000 subscribers and the potential for convergence, India can be in a position to reap benefits not too distantly in the future. And this is not about privatising nor about finding money to bridge budget deficits. This is about creating a vehicle that will pay for the much-needed growth in the communication infrastructure. At even a tenth of the market capitalisation achieved by AOL and Time-Warner, India will be uniquely placed to ride the new world wave. 8.
PUSH HOUSING TO
BOOST GROWTH Year after year, finance ministers unfailingly devote at least two paras to improving the housing stock of the country in an attempt to house homeless millions. The result of most efforts is at best mixed. THE IDEA: Bring down interest rate on housing loans to sub-sovereign or say 9 per cent. THE IMPACT: By bringing down the cost of housing loans to 9 or say 10 per cent (from the current 14 plus) the Government will offer incentives for savings to be channellised in asset creation. As more and more middle-class households venture out to borrow and build homes, the economy will benefit from the cascade effect. The move will push offtake in the cement sector (as has already been proved by last budget's initiatives), will push steel units to utilise full capacity, will push white-goods sector sales and, of course, other sectors up and down the value chain. Housing is one sector which has an influence on almost every other sector. Then the government's dream of housing for all might become a wee bit easier to achieve. 9.
ENCASH EQUITY STAKE
IN SBI It is nobody's case that the State Bank of India be privatised. India's largest bank (current market capitalisation Rs 12,939 crore) and perhaps the biggest player for years to come is uniquely placed to straddle the financial sector with the opening up of the insurance sector too. Provided it is unshackled from its ownership. THE IDEA: The Government of India should reduce its stake in the State Bank of India from the current 59.7 per cent to 26 per cent to allow the bank to be run professionally so that it becomes competitive. Up to 33 per cent of the government's equity stake in the bank could be sold partly to employees/public and partly to a strategic player who would be willing to tie up with the State Bank of India for the insurance business. THE IMPACT: The new entity which will be a player in both insurance and banking (besides elements of the value chain like credit and debit cards and e-commerce) would command a premium that will be unmatched. More importantly, the Government would have put in place a professionally managed financial entity that could some day grow and turn into India's top financial powerhouse. Of course, the sale (both strategic and public) of the government's equity stake would also bring in a minimum of Rs 5,000 crore to the government kitty but that is the by product. |
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