FM opts for a gondola, not a speedboat

The Union budget presented by finance minister P Chidambaram is a placid one. When the economy is firing on all cylinders, and when there is no significant political danger, he ought to have delivered a speedboat budget, charging ahead on reforms with visionary fervour.

Instead, he chose to cruise along with a paddle, on a gondola, serenading taxpayers and investors with soft words. Part of this is because we, the people, are tolerant and accept the excuse of inability to act due to ‘political expediency’. By doing so, we only give politicians more wiggle room for inaction.

The best thing Chidambaram did was to ensure stability in tax policy and continuation of fiscal direction. The increase of 2 % in the service tax, the hike in the securities transaction tax (STT), or the reinclusion of capital gains tax for computation of book profits for MAT companies is neither here nor there for the stock market.

The market was enthused by the fact that there were no unpleasant surprises and the Sensex rallied 394 points, to end the week at 10,595. The biggest contributors to this rise were Bharti (which contributed 49 points), ITC (47) and Tata Motors (41).

The stock market, of course, is notorious for its shortsightedness; for many investors a week may be considered long term! But what India really needs are the following: (1) Jobs for its burgeoning population, (2) power for the industries that provide part of these jobs, and (3) education for its people to enable them to get those jobs. In achieving these objectives much more could have been done.

Let us take each in turn. India is losing a wonderful opportunity to provide tens of thousands of jobs in, for example, the textile industry. After the textile market was opened up, the world is looking outside for outsourcing.

China has taken the lead; despite being a communist country, it has allowed units to be set up with flexible labour laws.

After all, if consumer demands change, manufacturers must have the flexibility to close after paying due compensation, but without needing state permission to do so.

Had the finance minister allowed this in, say, the special economic zones, there would have been a boom in job creation, in exports and in the growth of the oldest industry in India. The Left in India is redder than in China. It protects existing jobs (because of votes) at the cost of future ones. India will pay the price of this inaction years later.

The biggest thing going for India right now, and the reason why foreign investors are putting in big bucks, is its demographic profile. We have a young population, able and willing to work, provided we create the environment suitable for jobs to be created.

We are, in fact, at the same inflexion point the US was during the baby boomer years, which resulted in five decades of strong growth and prosperity. By not having flexible labour laws we are denying new entrants jobs, which can cause social unrest.

The government, by cowing to Left pressure, is doing the nation a disservice. We, the people, by accepting the excuse of political compulsion and by not protesting loudly enough, are doing our children a disservice.

Let us see power. The Economic Survey points out that the return on capital employed for state electricity boards has fallen from minus 32 % in 2004-05 to minus 26% in 2005-06. There are two reasons for this.

One is under-recovery of cost when state level politicians promise free/subsidised power to certain sections. Second is the theft of power, with official connivance. Pakistan had once faced a similar problem and solved it by sending in the army, with machine guns, to monitor power theft and recover dues! But we are a democracy, and  a tolerant one, to boot!

We are also running out of fuel sources for the power; this is why Bush and Manmohan have signed a deal to allow transfer of nuclear technology for civilian purposes. We must, however, tackle the twin problems of theft and concessions; there is enough generating capacity to meet power needs if we stop leakages. Perhaps it was in order to get Left acquiescence to the deal that introduction of flexible labour laws was sacrificed.

In fact, as India grows and its populace becomes wealthy, its energy needs will increase. We are striving hard to ensure energy security. But look at the excise concession given to small cars, for the sake of fuel efficiency. If fuel efficiency is the objective, why define a small car in terms of length or engine capacity, and not in terms of fuel efficiency norms? If a car manufacturer can meet those norms in a limousine, so be it!

And, since the world is running out of fossil fuels and will be moving to alternate fuels (biofuel, CNG, hydrogen, electric hybrid, etc) why not encourage, through fiscal concessions, the use of those?

The third is education. As per the Economic Survey, while attendance at primary level (Classes 1-5) is nearly 100%, it drops by a third in the upper primary level (Classes 6-8). Yet Chidambaram exempted cash donations made to fully religious trusts but not to education trusts.

In fact, the spend on education has dropped from 3.7% to 3.4% of GDP, against the stated target of 6. Using IT and telecommunications, one can spread the web of education to remote areas, through interactive distance learning using V-SAT terminals or other technologies.

Why not encourage this? A major reason for the 33% fall in upper primary attendance is because children at this age are seen as capable of earning money. Why not compensate the parents for keeping their children in school?

It would work out to be of lower cost, both financially and socially.

The good news is that the domestic savings rate is 29.1% and the gross capital formation is at 30.1% of GDP. With an incremental capital-output ratio of four, this can ensure over 7.5% GDP growth.

We need to boost this, with a conducive policy environment, and by providing infrastructure such as roads, electricity and ports, to maintain a growth rate of over 8%. Agricultural growth is low at 2.3% and needs to be increased, since it provides a quarter of GDP.

The market is now ripe for a correction, which one should wait for before buying. Demographics will ensure continuation of the bull run and should the major party in government get some strength in its vertebrae, the bull could run for a long, long time.