'Tax reforms were high on PM's agenda'

Montek Singh Ahluwalia, a key member of the triumvirate driving Indiaâ€™s reform process, shares his views on the budget with MK Venu and Tina Edwin. He feels Budget â€˜05-06 will lead to very inclusive growth in the economy. The Prime Minister has said that the Budget measures up to the challenges of our times. What are these challenges? How does the Budget measure up? The main challenges were in the areas of taxation, expenditure and policy. On the tax side, the task before the finance minister was very clear. The PM wanted a reforms-oriented budget, with tax reforms high on the agenda. In each of the areas there is clear evidence of reforms. On the personal tax front, there is a clear move towards the direction of lowering the rates, indexing slabs, reducing exemptions and rationalisation. That, I think, is a very good move. The lowering of corporate tax and parallel with that, lowering the depreciation rate, must be looked at as a package. A high depreciation rate, accompanied by a high corporate tax rate, discriminates against labour-intensive industries. Likewise, on indirect taxes. On customs duty, there has been a very clear move in the direction reform advocates have been directing. The PM and FM have been saying that we must bring our duties down and in line with those in other countries. The rationalisation of duties is more important because peak duties have come down and inverted duties have been taken care of. It is now clear that Indiaâ€™s ability to cope with a duty structure aligned with those in South East Asia just cannot be doubted. What about reforms on the expenditure side? On the expenditure side, inadequate attention to health and education in the past were major challenges. It is not just the question of providing more money, as there is this whole issue of using the money more effectively. We have to provide more money. But there has to be a parallel move for effective utilisation of money. Combined with that we have to look at measuring development outcomes. The government intends to evolve mechanisms to assess outcomes of expenditure on various projects. How do you propose to do that? We need to strengthen the role of the independent evaluation of outcome. This has become a major issue elsewhere in the world. Evaluation has to be independent. There is not much point in the same ministry implementing the project and evaluating outcomes. The Planning Commission is strengthening its programme evaluation organisation. The real problem with evaluation is that we get results three years after the schemes have started. We need some framework of evaluation where it is continuous process. Once the framework is right, non-government professionals should be involved in this. How does the Budget address issues of employment generation? Employment has to come from labour-intensive sectors. The Budget has done quite a lot for sectors like textiles, where many tax changes are pro-labour. There is a clear NCMP commitment that weâ€™ll have to move towards employment-guarantee schemes, and the food-for-work programme is the first step towards that. The employment-guarantee programme will be a vehicle for creating rural infrastructure. The mechanism is such that the Panchayati Raj institution will be actively involved, both in designing what infrastructure should be created as also in implementing and monitoring. Getting that done well will be quite a major task. How will Panchayats be strengthened to deliver? A lot of money will go down to the Panchayat level. The Panchayats will choose the projects they will want to work on. They will also determine what is the nature of work taken. They will have information as to what programmes need to be undertaken. We understand the Budget makes some beginning in district-level planning. We have announced creation of a Backward Regionsâ€™ Grant Fund. This scheme will fund project t hat are to be taken up at the Gram Panchayat level of the districts. Only states that set up district planning committees (DPC) will be provided assistance from this fund. DPCs would be required to build up the district plan from the Gram Panchayat level upwards, and get them approved by the Planning Commission. This, along with the food-for-work scheme, will ensure a more inclusive growth process. There is a perception that reforms are doing well for the country as a whole, but leaving out the weaker section. The two programmes and the Swaranjayanti Grammen Rozgar Yojana will ensure that Rs 21,000 crore is transferred to Panchayats. How will the challenges in infrastructure creation be addressed? Two significant steps have been taken. In the areas such as roads, there is a big step up in funding, with outlay being linked to cess. The cess has been increased and that I think is a good way of mobilising resources in an area we have not done enough. More importantly, we are also recognising that infrastructure cannot be created by public sector contracts alone. Hence, we will encourage public-private partnership. A very important initiative is the creation of the SPV. It will provide a new method of financing; long-term debt would be given for potentially viable projects of public-sector projects and PPP. Some infrastructure projects that are not viable enough can be made more financially viable if provided with viability gap funding. Ministries can also leverage some of the resources allocated to them to provide viability gap funding to BOT projects. This will bring in a lot of private-sector funds. Will Rs 10,000 crore for the SPV be enough, given the huge infrastructure-creation plans? To begin with, this should suffice. I donâ€™t think there will be enough projects to absorb this within the first year. If more viable projects come, more funds can be provided. In that sense the funds provided by the SPV could be open ended in the medium term. Initially, projects that have been identified as a priority would be financed. Will the SPVs provide funds for projects in the Urban Renewal Mission? Urban Renewal Mission is another major initiative of the government for which we have provided Rs 5,500 crore. This money can be used as viability gap fund for projects taken up under the mission. They would also be allowed to borrow from the SPV. Cities will be required to implement several reforms, such as reduction of property tax and stamp duty to avail assistance under the scheme. With such mega expenditures being planned, will fiscal correction be a problem? As far as I am concerned, fiscal deficit is not a matter of concern at this juncture. If tax reforms and other policy measures lead to robust growth in the economy, the fiscal correction will automatically follow and then things will take care of themselves.

'Tax reforms were high on PM's agenda'

Montek Singh Ahluwalia feels Budget '05-06 will lead to very inclusive growth in the economy.

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