Budget review: Benefits should be distributed equitably among all-II

As far as the exports are concerned, four major exporting industries textile, leather, surgical instruments and sports goods, are in crisis. In textile, even Bangladesh is showing improvement as compared to Pakistan. There are reports that 116 textile mills have been closed while 500000 spindles are now not working.
The result is that hundred of thousands of people have become jobless. It is true that textile industry is enjoying various incentives since long and further incentives alone will not resolve the problem.
However, keeping in view the importance of the textile (60% of exports are dependent on it) in our economy, it is a point to seriously ponder that why we are faced with this slow growth in textile exports despite too much focus on and incentives for the industry. Budget is also silent on this issue.
Custom duty on imports of machinery's and raw material used for non traditional exports like marble, furniture and horticulture sectors have been withdrawn. It is a good step. But exports in these sectors are very little so far and even an increase in these exports will not provide enough support to reduce trade deficit.
One of the main reasons behind rising trade deficit is increasing price of edible oil in international market. No strategy is adopted in the budget to enhance domestic production of edible oil. Allocations for development budget have been increased but it must be noted that a substantial portion of the last year's development budget was not used.
Therefore 36 billion rupees were reduced from development expenditures in the revised budget. In such a situation increase in allocations is not going to make any difference. Focus must be on good governance along with increasing allocations.
AID AND RELIEF: As said earlier, the political element seems to dominate the budget and any long term strategy to build the economy of the country on strong foundations is not part of the budget. Focus is on such measures and announcements that of course provide relief and some assistance, but impact only in the short-term and are adhoc in nature. Relief package includes the following:
15 PERCENT INCREASE IN THE SALARIES OF GOVERNMENT EMPLOYEES AND MOVE-OVER IN NEXT PAY SCALES 20 percent increase in the pensions of those retiring before 1997 and 15 percent for those after. Minimum wage for un-skilled workers has been increased from Rs 4000 to Rs 4600 while minimum old age pension has been increased from Rs 1300 to 1500.
-- Subsidy to reduce the prices of sugar, ghee and pulses at Utility Stores and announcement to set up new stores.
-- Announcement to build housing units in Islamabad and provincial capitals.
The present government has increased the salaries of government employees four times. It is an appreciable step. The salaries have been increased again by 15 percent this year. But considering almost 8 percent inflation and continuously rising prices of essential food items, this increase is too low.
The prices of essential items in days just before budget have increased to a level that this increase seems meaningless. It is also an important point that government employees are a small segment of the whole population. Obviously, a major portion of the population will not directly benefit from this increase.
Besides increasing salaries and pensions, announcement has been made to promote the government employees in next grades. Although notification has been issued for increase in salaries regarding the benefits, it is important to note that the allowance announced in the last budget is still not being paid to teachers in the largest province, Punjab.
Cumbersome official rules and procedures are in its way. Similarly, promotion and move-over of government employees are also pending for the last several years. Now the finance minister has promised to benefit 87000 employees though this announcement. How this would be made possible is an important question.
PRICES OF ESSENTIAL ITEMS: Like last year, announcement has been made to provide pulses, sugar, rice and ghee at subsidised rates through utility stores. It is however important to note that the role of government is to devise effective policies and enforce measures for price stability, not to trade the goods on its own.
Secondly, every Pakistani is well aware that only a small portion of population benefits from the Utility Stores and that too includes both rich and poor. The number of utility stores in the country currently stands at around 1100. The government has announced to establish new utility stores in next four months, increasing the number to 5000.
This is an ambitious target. It will not be less than a miracle to establish utility stores in that big number in four months. Even if it is made possible, on average it comes out to be one utility store for a whole Union Council. As such not many people will find to access to these stores living at a distance from the place a store is located at.
The announcements for provision of essential items at affordable rates were made in the past as well, but the common experience shows these items are hardly made available. It is also witnessed that staff of utility stores sells the same items to traders in the market.
As far as reduction in prices is concerned, the prices of rice, ghee and many other items have increased so much in the last few months that despite the announced decrease, these will remain very high. As to the inflation, it is 7.9 percent while food inflation is 10.24 percent. The government says that this high rate of inflation is due to increase in the prices of edible oil, powder milk and tea in international market. It is true to a certain extent.
It is, however, a fact that increase in prices is not confined to these items. Despite bumper wheat crop and good rice harvest, the prices of these very important food items have also increased extraordinarily and this increase played an important part in food inflation going that high. The government did impose a ban on export of wheat but, by that time, the prices had increased considerably.
To control such inflation, the country needs a policy that reduces the cost of consumer products, particularly essential items. In this regard, steps like reduction of import duty and sales tax on items of daily use can be helpful. On the other hand, inflation can be tackled with an effective monetary policy and addressing the supply and demand issue. This is not visible in budget measures.
The part played by hoarding and profiteering regarding high prices is well known. It was announced in budget 2006-07 that price control magistrates will be appointed. While this promise was hardly fulfilled, even if some appointments were made, their results are not visible.
In budget 2007-08, the hope given to the nation is to control prices through utility stores, which is not effective. Any long term plan to tackle the issue is not part of the budget. It is also important to point out here that out of some 210 billion rupees of subsidy claimed by the government, Rs 98 have been allocated for WAPDA and KESC. Similarly, subsidy announced for reduction in the prices of fertilisers will go to the producers and will not be a direct relief to consumers.
BANKING SECTOR: Around 7 to 8 percent expansion and growth in banking sector during last few years is an extraordinary aspect of the Pakistan economy. However a major share of resources with the banks to consumption loans.
This affects its direct role in developing the industrial base and promoting investment while it is increasing conspicuous consumption in the society. On the other hand, the benefits of the expansion in banking sector have not been passed on the account holders.
In some cases, profit on small accounts has become negative while heavy services charges are increasing continuously even for ordinary transactions. It is not surprising in this background that banks have earned profits of over Rs 90 billion in 2006. It is interesting to note that Governor State Bank of Pakistan has also demanded that banks should share the profits with depositors. However, despite such pressures and various announcements, banks have not come up with any measures.
The government had started a vigorous campaign for recovery of non-performing loans of the banks but that seems to have ended without any extraordinary results. In fact, it is a matter of concern that while loans of Rs 30 billion were written off between 1985 and 1999, much more loans have been written off between 2000 and 2006.
Another factor demands attention that share of largest six banks in the country's banking sector is 63 percent. Certainly, these banks are getting a position in which they influence the economy to a large extent. If the banking sector is not regulated effectively, good governance in economic filed cannot be achieved.
SOCIAL SERVICES AND THE BUDGET
EDUCATION: The expenditure on education for the year 2007-08 has been increased to Rs 24 billion from Rs 18 billion of the last fiscal year. It is indeed a good increase. However a big chunk of this increased amount ie 17 billion rupees, has been allocated for higher education.
Only rupees 4.7 billion are for primary to secondary level education. It is good to spend on higher education, but considering the 46 percent of population being illiterate, the real need is to promote basic education. Finance minister has said in his budget speech that spending on education is being increased to 4 percent of GDP, which is good intention, but it is not reflected in the amounts allocated.
HEALTH: Lack of healthcare facilities is an important problem for the people of Pakistan. The expenditure on this important social service is being increased but only marginally, from 4.7 billion to 5.2 billion rupees. According to Economic Survey, expenditure on health is 0.6 percent of GDP, even less than 0.7 percent of 2001-01.
HOUSING: Shortage of housing facilities is an important problem in our country. According to Economic Survey 2005-06, the country was facing a shortfall of 6.1 million housing units. While chapter of housing is not included in this year's survey, based on the last survey figures the shortage should now be around 7 million.
This is because every year, the number of new housing units constructed are much less than the rising demand. According to Economic Survey 2005-06, some 500,000 housing units are required every year for next 20 years to bridge the present shortfall.
However, it is regrettable to see that presently, the prices of land, which is the basic requirement for building a housing unit, are sky-rocketing. It has become almost impossible for a common man to build or construct a house. No serious effort is visible to regulate the real state sector.
Not much research is needed to know that if the prices of property are that high in the country, it is because residential lands are in the hands of a few ultra rich. New housing schemes are also in the hands of these people. As there is no visible investment from the government in this sector and responsible national institutions are indifferent, the situation is aggravating.
The government has announced in the budget that 50 thousand new houses will b built in Islamabad and provincial capitals. CDA has been instructed to develop a new sectors of 3 and 5 marlas for the low income group. These are welcome announcements, but much less than what is required. What is needed is a large scale national program aimed not only at targeting housing requirements of low income groups in the cities and towns but also a focus on developing new small cities.
SYSTEM OF TAXES Revenue receipts have witnessed significant increase in recent years. CBR collection rose to 733 billion last fiscal from just 300 billion rupees some 5 years ago. In the eleven months of fiscal year 2006-07, these have increased by 18 percent, reaching more than 720 billion. The target for next financial year is Rs 1025.
However, it needs to be noted that tax to GDP ratio has decreased, standing at less than 10 percent presently while it had reached 13.2 percent in 1998-99. Only one third of whatever taxes are being received is collected from direct taxes while two thirds are indirect, thus the burden is falling on common man in the form of GST and other taxes.
An important point highlighted in the budget speech was that we will take from the rich and give to the poor. There is some talk of giving to the poor in the form of relief discussed earlier.
However, any strategy to take from the rich is not visible. Obviously, the way to take from the rich is to tax them. It is said that number of tax payers has reached 1.5 million now but it is less than one percent of the total population. What will be the strategy for future, there is no visible measure in the budget.
Feudals and big landlords are already exempted from taxes. Almost nothing is being received from those earning millions of rupees from stock exchange and real estate business in the last few years. Market capitalisation was Rs 366 billion rupees in Karachi stock exchange in December 2001, that has now increased to 3700 billion rupees.
While some new companies have also been listed, a very big chunk of this wealth has been created due to rise in prices of shares of companies listed already. As a result, the shareholders, only a very small segment of population, have managed to earn huge amounts. Inequality of wealth apart, tax being charged on this, is only 0.02 percent.
The ratio of tax charged in India is 0.25, ten times more than us. Similarly, tax on wealth created through property business by a few individuals and families is negligible. It was needed to tax these two sectors reasonably, but no such announcement was made in the budget.
Confidence in the government plays an important part to improve the tax culture. This confidence is established if people's needs in everyday life are met. The government and its functionaries seem to be sharing the burden of the hardships along with the common man and represent their views and wishes on national and international issues. Unfortunately, the situation regarding these aspects in our country is not that encouraging.
ENERGY CRISIS Proper supply of energy is necessary not only for economic growth but for provision of social services and improvement in living standards. The installed capacity of electricity generation, an important source of energy, has not increased form 19400 megawatts for the last three years.
The energy crisis all over the country and particularly in the largest industrial and business center Karachi is at its peak. Despite all promises, funds for Kalabagh dam were not, once again, allocated in the budget. The work on announced reservoir, Basha Diamer dam is very slow.
Only 520 million rupees have been allocated for the dam in this budget. Neelum-Jehlum hydro power project has been announced but obviously it will take a long time. There is no plan in the budget to exploit considerable potential of hydropower in the country and benefit from the alternate sources of energy.
The line losses in electricity distribution are also very high in the country and to control these line losses, it is needed to improve the efficiency of WAPDA and KESC.
It needs to be noted that the price of electricity is already unbearable for people but the government is in the process of making agreements with Independent Power Producers to buy electricity at high rates. Incentives are being provided to promote the use of generators.
This temporary solution can be beneficial for a select number of household but it is not accessible for a large segment of the population. It is evident that the crisis does not seem to be resolving in the near future while it will increase the oil import bill.
Economic policy is closely linked with priorities of the government. In the context of present day Pakistan ,creating an environment where government, civil society and private sector, all can play role in harmony and in a way that the economic development, social and economic justice are ensured and income inequalities are minimised is urgently needed.
This is possible only when the policies are formulated keeping in view the poor and deprived segments of society. The attention is on improving their capabilities rather than providing only short-term relief. Dependence on indirect taxes is minimum and those industries, services and businesses are encouraged that provide more opportunities of employment for a common man, despite relatively less education and skills. As a whole no such strategy is visible clearly in the budget 2007-08 that can be termed as a prelude to establish enabling environment to achieve these objectives.
(Concluded)