Financial Daily from THE HINDU group of publications
Thursday, Mar 14, 2002
Budget leaves economy in the cold
THE Finance Minister, Mr Yashwant Sinha, has belied the expectations he had himself studiously created in a rash of interviews to the media at the turn of the year that his Budget would give a strong thrust to public investment to generate the demand needed for a bounce-back of the economy entering the Tenth Plan and aiming at an average annual eight per cent rise in GDP.
The 2002-03 Budget he unveiled on February 28, whatever merits it may have, does not square up to the huge claims he has made about the direction of the fiscal exercise, especially in regard to reviving demand, enhancing private investment and accelerating economic growth. He may have widened the tax base direct and indirect in a desperate attempt to shore up revenues, with no matching efforts on expenditure side, but still leaving the fiscal deficit untamed.
If he has not made fiscal correction the core of his exercise, Mr Sinha has neither provided the desired investment push despite resorting to a record additional resource mobilisation of Rs 10,500 crore, with the belief that the higher plan outlay would translate into higher output. His Budget has, therefore, had a cold reception and is not viewed as an engine for growth for the coming year.
It is not clear what made Mr Sinha re-think his approach, but he must not have been prepared for the overwhelming sense of disappointment with which the Budget has been received by trade and industry as well as the markets and the community in general. His task in the coming weeks will be to provide justification, pointing out the sops here and there for support to infrastructure and private investments. He has already defended the cumulative burden thrown on the middle-class, by saying that sacrifices are needed for macro-economic stability.
Mr Sinha's last celebrated Budget did not help raise private investment that made him see the need for a change in strategy warranted by the depth of the industrial slowdown. True, there is an increase in the Plan allocation by Rs 2,500 crore for the Accelerated Power Development and Reform Programme, which will be for States implementing power sector reforms, as agreed with the Centre.
There are similar reform-linked provisions under irrigation and for urban development. For roads, the National Highway Authority is expected to raise borrowings and avail of multilateral funding to complete the Golden Quadrilateral.
Private sector participation is to be encouraged in airport construction by the end of 2003. The Budget support for the increased Plan outlays for power and national highways is minimal as these rely essentially on internal and external resources of public undertakings. Year after year, there are shortfalls in such internal mobilisation of resources by the undertakings, though, while budgeting, the "public investment" proposed looks impressive.
It is only as a preface to his tax proposals that Mr Sinha talks of "specific interventions" to provide a stimulus for industrial growth and sees his 15 per cent additional depreciation proposed on new plant and machinery acquired on or after April1, 2002 as an incentive for investments in the industrial sector. Some welcome relief measures are for the textile industry, given their importance in exports, tea and steel, that have been facing domestic and international problems.
Thus, the Budget has impacted manufacturers, marginally, but the changes in the excise duty structure and price rises for LPG, kerosene and urea have been drastic. An exercise to raise Rs 6,700 crore by duty changes can hardly be expected to be price-neutral.
The Finance Minister anticipates a revenue buoyancy in 2002-03 after a year of shortfall of Rs 20,000 crore on the Budget estimates for this year on the plain assumption of a strong economic revival, whether his Budget fuels it or not. He, probably, thinks the worst is over, that GDP growth in 2001-02 would be above 5 per cent, over the 4 per cent recorded in 2000-01, and there are signs that the locomotive of the world economy, the US, is now nearly rid of recession.
Mr Sinha must have based his calculations on the fact that there would be increased exports which would help revive manufacturing and with the Budget proposals on reducting corporate tax on foreign companies to 40 per cent from 48 per cent, and the raising of ceilings for foreign direct investment in more sectors, India could attract larger FDI flows. The Budget puts greater faith on NRIs and foreign capital and, however tardy, the pace of implementation of announced reforms, Mr Sinha keeps up India's image on the globalisation track. Besides the new routes opened for FDI, the reduction of peak tariff rate from 35 to 30 per cent and the option given to foreign banks to set up subsidiaries as part of banking sector reforms are bound to be viewed positively abroad.
Apparently, Mr Sinha opted for a safer course in these politically-tumultuous times by focussing on agriculture and rural development, with only few give-aways for the corporate sector, while courting foreign investors. But, even so, his harsh levies which would fall upon income groups at various levels have not endeared him even to the ruling establishment.
The BJP MPs want a rollback of some of the proposals, chiefly the Rs 40 hike on LPG, but one has to look beyond and see how far the Budget goes against the interests of relatively low-income groups through the combination of 5 per cent surcharge, dividend tax, lowering of interest rates and withdrawal of exemptions for tax purposes.
Questions arise as to whether the strategy adopted by Mr Sinha is appropriate in the present state of the economy and supportive of growth. There is also the contrary view that Mr Sinha tried to do what is possible and presented a workmanlike budget. For, there was an attempt to effect fertiliser and POL subsidy reductions and also widening of the base of taxation, direct and indirect. What would have gone down well was a judicious mix of revenue raising and expenditure-cutting, instead of heavy reliance on mopping up revenues. In the process, he has been friendly neither to the savers nor to the investors.
The Budget does not certainly bring about a shift in expenditure in favour of public investment in infrastructure in support of growth revival. The Finance Minister, perhaps, concluded that any such attempt would have led to expanding the fiscal deficit beyond the targeted 5.3 per cent of GDP. He would plead that he has not crossed the limits of prudence in a difficult situation, whatever the judgment on his budget proposals and the strategy he has built into it for investments and growth.
Fiscal deficits (as total subsidies) have been on the rise through Mr Sinha's budgets, touching 5.7 per cent, the highest since l993-94, over the last two years and once again, he faces the prospect of his target being exceeded by a significant margin.While emphasing that putting the fiscal house in order must remain the highest priority,
Mr Sinha has somewhat lowered his sights on fiscal consolidation over the medium term. He hopes it would be possible to reduce the total subsidies (with a Budget provision of Rs 38,923 crore next year as against the Rs 20,696 crore in his first budget in 1989-99) to a minimum over the next three-five years, and bring down the consolidated debt-GDP ratio to sustainable levels by 2005. Mr Sinha will be forced to make adjustments in his tax proposals at the Finance Bill stage in Parliament. But as they are, the Budget has not won him laurels and is not viewed as adequate to revive the economy or galvanise the requisite investments for a take-off.
It is pro-development, as Mr Sinha describes, inasmuch as there is a significantly large step-up in the Central Plan outlay for which the Budget support will be Rs 6,600 crore higher, and also does carry-forward reforms in the agriculture, banking, capital market, and oil sector as well as liberalisation of the capital account with full convertibility for all NRI deposit schemes.
Overall, the Budget should find favour with such institutions as the IMF and the World Bank with its trade liberalisation, carry-forward of reforms in a number of areas, especially agriculture and power sector at the State level, and foreign investor-friendly measures. There will, however, be serious concern over the over-run in fiscal deficit and the lack of a clear road map to bring down the deficit and debt GDP ratios.
Mr Sinha may win over sceptics if he ensures effective implementation of the reform policies, opens up the agriculture sector by providing the promised rural infrastructure (roads, marketing and processing units), and goads States to accomplish the power distribution and transmission reforms with cost-based user charges for both power and irrigation water.
If demand picks up, on the strength of the improvement in agriculture in 2001 and the emerging recovery in the US and Europe, India can move out of the low-growth syndrome and tax revenues will not be wide off the mark.
The biggest failure lies in the food muddle with unsustainable level of stocks rotting in godowns in a land of hungry pockets for which the Centre and the States should share the blame.
(The author, a former Chief News Editor of PTI, now writes from Chennai.)
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