23 May 2004	Sunday	03 Rabi-us-Saani 1425

KARACHI, May 22: The budget 2004-05 will come against the background of a high economic growth fuelling soaring inflation. Official figures indicate that inflation (CPI) rate is running at six per cent, about the same pace at which economy is expanding.

While a robust economic growth rate may have some trickle down effect, a high rate of inflation hurts the poor most. Thus, a major challenge facing the budget-makers is to manage a high growth with a low inflation.

In fact, the issue of inflation is linked to a much wider problem of growth with equity (social justice). For the past five years or more, the poor have been excluded from the benefits of economic reforms.

It is a question of disparities in household incomes and inequitable distribution of assets and wealth among rural and urban dwellers and among the provinces.

With soaring inflation, income tax on salaried class needs to be rationalized and updated. Some reports indicate that exemption limit on personal incomes may be raised from Rs80,000 to Rs100,000. As the economy picks up, more and more professionals would be required. Taxation should not induce brain drain.

The failure to reach a consensus on the NFC award before the budget will mean that the federation and the largest province would retain their privileged position for at least yet another year on fiscal matters. It is the minority provinces and rural districts which will suffer most by denial of a meaningful fiscal autonomy to them.

To create trade surpluses for heavily subsidized exports, the domestic demand has been depressed through the exorbitant rates of sales tax on goods and services and farm inputs like fertilizer that inflate foodgrain prices. Subsidies that helped the poor have been gradually withdrawn.

As the export is textile-driven and is not fuelled by a wide range of goods and services produced by a diversified industrial base, the potentials of export growth are limited. So is the sustainability of export growth in the long-term.

The industrial base needs to be diversified, perhaps more easily on the back of domestic demand rather than foreign sales in a competitive global market. For this to happen and for the country to become an industrialized state, there is a need to have a comprehensive industrial policy.

Initially, the start-ups could be based on appropriate combination of local and foreign technology that could be later upgraded for exports. The strategy of export-oriented growth needs to be replaced by a policy of exchange of trade surpluses with foreign trading partners, after the domestic needs are met.

Policy-makers should not forget that in the past the export strategies have failed to bridge an import-export gap, but for a few exceptional years, and have landed the country into a debt trap and in the lap of international lenders. The rising current trade imbalances reflect the same trend.

Both India and China opened up their domestic markets to global competition much later than Pakistan. They did not succumb to premature globalization. They are performing better than Pakistan.

There is a need to build upon industrial foundation that has been laid so far. What has been accomplished in the field of automobile industry may be emulated in other spheres of light and heavy engineering, so as to reduce the dependence on imported machinery and plants.

The Engineering Vision given by former federal minister Razak Dawood has been frozen. Measures need to be taken in the next budget to develop the engineering industry.

Local investors should be encouraged in the first instance when it is generally acknowledged that foreign investors follow their domestic counterparts.

Although agriculture is the foundation of the national economy, not enough efforts have been made to modernize farming and raise per acre yield. The outcome is that the government plans to import one million tons of wheat this year. The batai or crop-sharing under which the zamindari system works in the countryside needs to be replaced by cash contract system, through a combination of legislation and a set of incentives over a specified period of time. Without modernization of agriculture that provides raw materials and markets for industry, the economy cannot move fast on a sustained basis nor can rural poverty be reduced.