Budget 2005-06 in Perspective
By Shahid Kardar

The 2005-06 budget announced on last Monday is in many ways a finely crafted growth and export-oriented budget. Its very positive features include the those that have a direct bearing on this sustainability of growth, higher exports, higher allocations for development, tax concessions, reduction in duties and reliefs for low income groups.
These are evident from: a) elimination of GST on inputs of the textile, leather, carpet and sports goods industries. This indeed is a major step that will reduce the cost of doing business. In particular, the textile industry that exports 95 per cent of its production will be saved from the drudgery of obtaining sales tax refunds. b) Reduction in the rates of individual and corporate income tax. c) Rationalization and reduction of customs duties, particularly for inputs and machinery of the agriculture sector. d) A sharp increase in development expenditures (although this begs the question if a government machinery that has failed to make much headway in the execution of the significantly smaller development program for the year just ended, can implement a program of this increased size.).
This discussion will, however, focus on the areas on which the budget speech chose to remain silent. To begin with, despite the several welcome tax concessions, it is assumed that the healthy increase in government revenues will come from growth and improved administrative efficiency, although the tax-to-GDP ratio may, in fact, continue to remain stagnant, if it does not actually fall. Whereas on the face of it, the assumption is not unreasonable, much will depend on the tax collection capabilities of the CBR during the year, since revenue collection during the last two years has not matched the growth in those sectors and sub-sectors of the economy liable to both income and sales taxes.
It will take time to put the genie of inflation back into the bottle. There is a huge monetary overhang that will take its time to work through the system, keeping the rate of inflation high for much of the year. Better monetary management will be required, which in turn will call for a further tightening of interest rates (including making them positive in real terms as currently they are below the rate of inflation) that would most probably affect investment levels and thereby the growth rate. In any case, it is not quite clear how the economy, with little spare capacity, can be expected to grow at seven per cent, with an even lower savings and investment to GDP ratio.
Moreover, managing the impact of higher interest rates on consumer finance will be a trifle tricky. Apart from affecting their capability to service existing loans, it would make consumers shy of additional borrowings thereby reducing the demand for consumer durables that had fuelled both demand and production of these items through cheap finance in recent years.
The third area of concern is the huge trade deficit which would be expected to widen further, at least in the short-term, because of the lowering of import duties, although some of this would also benefit exports and thereby partly have a salutary impact on export earnings. Whereas this deficit will have to be met from remittances and external borrowing, one factor constraining growth in exports that is not being acknowledged is the overvalued exchange rate.
With our inflation rate substantially higher than that of our competitors and trading partners, the will have to bite the bullet and allow the rupee to depreciate by at least five to six per cent in order to maintain international competitiveness and the profitability of exports for Pakistani exporters.
Of course, the downward adjustment of the exchange rate will increase the cost of imports, thereby feeding inflation as well as adversely impact upon confidence in the currency. But there is hardly any option left on this front, and the quicker this revision is effected, the more manageable will be the side effects.
How will the government enforce the minimum wage of Rs3,000 considering its miserable failure in implementing the minimum wage of Rs2,500, announced as far back as 2001. As it is, the minimum wage law does not extend to agricultural workers while the government has exempted itself from the ambit of the law. Nor does the government require its contractors on infrastructure projects to pay their laborers minimum wages. Therefore, it has no moral authority to ask others to implement it.
Moreover, even the new minimum wage of Rs.3,000 per month will fail to compensate workers for inflation, thereby failing to protect the living standard of workers, a professed objective of minimum wage legislation; the 1992 minimum wage of Rs1,500 adjusted for inflation works out to Rs3,875 in 2005.
Our findings from the government’s labor force survey of 2003-04 are that the wages of elementary workers, the focus of the minimum wage legislation, grew only slightly, resulting in a large erosion of real wages from Rs2,671 in 1997-98 to Rs2,374 in 2003-04, i.e. real wages are lower in 2003-04 than in 1997-98 in both urban and rural areas, even before the double- digit inflation of 2004-05 hit them.
In fact, 26 per cent of all wage earners and 14 per cent of regular workers were earning less than the prescribed minimum in 2003-04, highlighting the poor implementation of the minimum wage legislation.
Finally, the perception that will gain wide currency will be that the incentives to invest in speculative and non-productive activities (like real estate) continue to be stronger than those for investments in real and productive sectors of the economy; and that the bulk of the budgetary benefits and incentives are either meant for affluent segments of the population or those occupying the ranks of the civil and military bureaucracies, the assemblies, and their friends and relatives. The gap between the rich and poor will widen, and regional disparities will be accentuated as more and more resources are retained by Islamabad for funding its own portfolio of development schemes. (Courtesy Dawn)
The writer is former finance minister, Punjab.

Editor: Akhtar M. Faruqui
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