In an interview with equitymaster.com, Mr. Mahesh Vyas, Executive Director, CMIE, shared his views on the Budget and what remains to be done in the infrastructure and agricultural sector to make India globally competitive.
EQM: How do you rate the budget on a scale of 10?
I would say around 7.5 to 8. I think it is a bold budget and I think the two most important things are the reduction in interest rate for small savings and labour reforms. I think these two from a long-term macro economic perspective of improving the competitiveness of the economy are really very critical. I think that any expectations of this budget leading to a quick recovery will be misplaced. But that should not cloud the longer-term benefits of the budget.
For the first time after several years, the Finance Minister has addressed some sensitive areas like labour reforms and trimming of the workforce. As a result, where do you see labour laws evolving in coming years?
I think it has taken a fair amount of time and it is fair to the labour sections as well. The writing was there on the wall for labour and they are responding in a very smart way. Right through the 1990s, militancy has come down in the labour and labour mobility is on the rise. People now accept retirement schemes far more easily than ever before and people change jobs. I would grant that some of it is cohesive. But I would also say that despite the fact that there has been some cohesiveness, labour has also been mobile.
The laws, which acted as a hindrance to labour mobility, have become an anachronism. So, some part of the labour will have to move into the new environment, which would enhance labour productivity. So appropriate skilled labour is more valuable than mere labour, which has been there for a long time and takes employment granted for life. That has to change and we did not do this in a rush and that is commendable. But, from now on, we cannot wait for labour availability and prices to be driven by market forces.
EQM: What do you think is the single most important proposal initiated in the budget?
Mr.Mahesh:There are two equally important things. One is the reduction in the small savings rate, which has beaten everybody’s expectations. This is very bold but it is still very important. This will reduce the overall interest rate structure in the economy. So, the cost of capital will come down in the medium to long run. Further, the availability and price of labour will also rationalise.
EQM: Do you think that the initiatives on the infrastructure front would lead to higher investments and FDI into the country?
Mr Mahesh:I don’t think the budget has done anything great for infrastructure and I don’t think he can do much more on this front also. What the infrastructure requires is the setting up of a regulatory authority. By saying that the Electricity bill is to be introduced, it is an intension and not an act. One has to see how it is implemented and what are the contents of the bill. But, it will take a lot more to get infrastructure moving. The problems of infrastructure have not been fully addressed in this budget and I am not expecting such a move also.
EQM: What are issues that have to be tackled to make both agriculture and infrastructure globally competitive?
Mr Mahesh:We need to ensure that the risk in agriculture comes down. That agriculture becomes a competitive industry for us. As WTO comes in April 2001, it is possible that international agricultural commodities will flood the Indian economy. For instance, you get Australian and New Zealand apples but you get less of Simla apple. But, will our agriculture suffer in the same fashion as our manufacturing sector? Increasingly manufacturing sector is being shut down. So there is no surety that agriculture will not shut down if we don’t address the problem of the risk in agriculture and finding out our competitiveness (global) in agriculture. How will we feed the world with whatever we produce? It could be any set of crops. We have so much of arable land (we have the second largest arable land in the world), we also need to figure out how we utilise our assets. Since we have both agro-based and metal-based resources in the country, we could emerge as a winner. Except that we do not seem to understand how to work efficiently to take the global industry head-on.
On the infrastructure side, it is essentially a problem of getting the institutional framework right. To ensure that before you sign up a deal for private sector participation in any sector, you get the regulatory framework right, to ensure transparency and sustainability and don’t get into legal battles with them.
EQM: Do you think the reforms initiated on the agriculture front would be of help to the small farmers?
Mr Mahesh:There are no reforms in agriculture. It is the same thing. Interest rate on RIDF has been reduced from 11.5% to 10.5%. Kisan Credit Cards should be promoted more but this was announced earlier. Besides these two, there isn’t anything significant that would reform the agriculture sector. By saying PDS would be taken over by the state governments is not a reform. But it is just passing on the onus and responsibility to the state.
EQM: The Finance Minister has targeted a 13% rise in net tax revenues in FY02. Given the fact that surcharge on income tax and dividend tax are cut in the budget, will he be able to achieve it?
Mr Mahesh:That depends partly on the way the economy grows. Tax revenues are also a function of the economy. That is a bit difficult to predict. There is no reason today to believe that the target set in the budget on tax collection will not be met and there is no reason to confidently say it will be met. I think it is a fair projection and should be taken at its face value.
EQM: There has been a history of service tax being levied in the Budget and later withdrawn because of industry pressure. Do you see this happening again in the current year also?
Mr Mahesh:That is a political problem. It is not in the realm of economics. It depends upon where you are in the entire history of the era. So, when P. Chidambaram announced it, it had to be withdrawn due to clear lobby of fleet operators. But that does not reduce the importance and significance of these factors. I think the effort made to widen the tax base by including more number of the services sector is a commendable act. But will politics play a role in reducing it remains to be seen? My guess is it will not.
EQM: How do you see the Indian economy performing in the current year in light of reforms undertaken in the budget?
Mr Mahesh:The budget has got an impact on the long-term performance, which are relevant to the economy. The current year performance as far as the budget is concerned has two three ways in which it will impact the economy. One is through its direct and indirect tax proposals. Two is through its expenditure plans and I think the tax proposals have not been so dramatic that it will have a major impact on the economy in the coming years performance. They are placid. Has there been a significant rise or decline in tax rates, then it would have notable effect on the economy. There are small increases in customs duty, which are unfortunate. For the rest, taxation is ambivalent for the coming years economic performance.
So far as the government spending is concerned, they have budgeted an 11.8% growth in govt. spending in this year, which is higher than last year and it is higher than the year before as well. But still kind of average because in the preceding three to four years, we have seen an average growth in expenditure of around 15%-20%. When govt. spending increases, it clearly leads to a rise in demand in the economy. It does not matter whether it is planned expenditure, non-plan expenditure or capital expenditure. The govt. estimate for the next year is neither too high nor too low to lead to a change in demand. So, the economy will not get impacted in a very great way - negatively or positively in the coming year. But in the long run, I think it is a great budget.
EQM: If we were consider the Indian economy, more than 50% is led by services sector whereas industrial sector contributes just 27%. How do you see this business mix?
Mr Mahesh:Yes, India has grown faster as a service economy. I believe that we have not yet exploited opportunities in the agriculture sector yet. So we are basically skipping the industrial revolution all together and moving into the service based economy. It is fine for a country like Luxemburg, Belgium and even Singapore. But for a country with more than 70% of the population still dependent on agriculture and the industrial sector is very important from the employment point of view, I think services growth in good. But we certainly need to pump up growth in agriculture and industry.
EQM: Could the government have done something in the budget to address the issues in the agriculture and the industrial sector?
Mr Mahesh:Yes, it could have been more imaginative. I am sure that there is enough scope for doing that. Partly, the Finance Minister has said that the expenditure reforms committee is looking into these issues for re-aligning the government spending. I think he said it in the Xth plan that all schemes would be re-thought out. I think this is very important as there are too many schemes being run too inefficiently. So, we need to consolidate the govt. spending to something more useful and something more efficient.
On the infrastructure front, I think the government needs to spend more and it needs to spend itself. Private sector participation is fine. I think the plan outlays for NTPC, HPCL and other PSUs should be increased to help them increase production and productivity.