Club India: Who's In?

Indeed, rarely has a budget been preceded by so much gloom and so little hope. The third consecutive year of slowdown, one of the lowest GDP forecasts (4.5 per cent), two near-negative agriculture growth years in between, the nth year of a futile fight with the fisc and a global recession to boot. Tough conditions even for the brazen! Imagine, if the finance minister had been bold enough to blaze a brave new trail, he’d have engraved his name in gold in Indian economic history.

Instead, a cautious and probably tired Sinha chose to strike a delicate balance. Between second-generation reform ideas and political realism, between the must-dos and can-be-ignoreds, between sagging earnings and skyrocketing need for investment. A hesitant, brilliant in parts but confused, hands-tied set of equations that brings back the memory of his initial efforts. After the debacle of his last visionary budget, easily one of the best, Sinha has preferred to be practical and unambitious, but can he still save this one from drowning in the precarious political backdrop? Sums up Pashupati Advani, director, Advani Sharebrokers: "Overall a decent budget. But it won’t put money in your pockets right away."

The trouble with the FM is that he takes criticism too seriously—sometimes personally—and thus often settles for half measures. And this budget is full of them. He’s been fearless enough to deal a heavy blow to the middle class whom reforms easily hurt the most: raised tax through surcharge (see box), axed rebates, cut small savings rates, imposed dividend tax (hits income from mutual fund, shares), raised prices of sugar, LPG and PDS kerosene as also urea. Allies may be baying for his blood, the media may provoke the middle class into apathy, but reformists will have to acknowledge that no other FM has done so much in one budget (except in 1991).

Yet, the success of a budget will always be measured by its vision. And there’s no coherent plan in this butchering of the middle class. A 50-basis point cut in interest (your PPF and postal plans will now pay only 9 per cent), even as he made it market-determined, is too low to save industry’s capital costs or prompt the middle class to consider other better-paying investment avenues like private insurance schemes and equities. As for halving the rebate, a better plan would have been to halve the quantum of qualifying income from Rs 60,000 to Rs 30,000, which would have actually released the money to invest elsewhere.

But the government wants to have its cake and eat it too. Small cuts in the interest rate each year make government borrowing cheaper—despite new debts, interest payments have slumped by Rs 5,000 crore in the revised estimates this year, or over half the non-plan expenditure saved, allowing the government to take a bow on its success in till-management. A nice little trend developing there, even as the rebate cut ensures most of the tax-saving still goes to government kitty. Does North Block honestly expect the risk-averse, tax-saving middle-aged and old Indian, the clientele of government schemes, to put away their lumpsums in stocks and private insurance?

Every budget must face two questions: how much money is taken away from the people and more important, how well is it spent? The government’s record does not inspire any confidence on either front. This budget, in particular, fails on both counts in terms of its numbers and expectations.

Let’s look at revenues first. Despite a 13 per cent shortfall this year, Sinha has projected tax revenues to rise at the same rate in 2002-03. That means he expects a 22 per cent buoyancy over revised estimates (the actuals may be even less). On what basis? Wouldn’t it have been safer to just double the disinvestment target to Rs 20,000 crore? He himself admits that selling just two firms will get him that sum. He could have also taken care of the stockmarkets then, that’s one of the major expectations funds and brokers had.

Says Nikhil Khatau, CEO, Sun F&C: "The budget by itself is not going to create stimulus for growth and is not a pump-priming one but is just following the same old reforms programme." But Sinha just assumes growth will happen. And a very high growth at that. Finance ministry officials affirm the assumption of a 6 per cent real growth. But projecting from the fiscal deficit, one gets a nominal GDP growth of 10.6 per cent. With inflation at a record low of less than 1 per cent now, and even assuming it’ll go up three times, the real growth rate comes to 7.6 per cent. This seems more than ambitious, it looks like pure wishful thinking.

Obviously, there’s a pump-priming programme in here somewhere. That’s clear from the fiscal deficit numbers alone. Instead of the projected 4.7 per cent, Sinha ends up with a huge 5.7 (blame it on the yawning gaps in excise and customs collections) and keeps it almost untouched next year. Save the taxation effort, which brings it down somewhat to 5.3 per cent. So pump-priming by borrowing is what drives the budget. Where does this money go? Plan expenditure, which rises by one-fifth next year. Sectorally, most of this money is going to agriculture, energy, transport and social services. More important, most of this money is going to states, some of it as plain assistance.

If there’s a hint of a grand plan in the budget, it’s here. Sinha calls it a reform-linked plan for states. Which means, in sectors like electricity and agriculture, which are state subjects and where reforms are overdue, states undertaking reforms will get the money. Some of this money is also linked to the new and welcome initiative of the Urban Reform Initiative Fund with an initial corpus of Rs 500 crore. The Planning Commission, which has been pursuing this approach for two years to correct the fiscal situation of bankrupt and errant states (or rather, stop them from cleaning up the Centre), has had mixed success so far. The grand plan works only if the money is linked to results, and doesn’t raise much hope when one remembers the tardy success rate of Yojana Bhavan’s programme evaluation efforts so far.

So there’s the basic balance-sheet of Budget 2002-03—Rs 18,400 of fresh plan expenditure and Rs 10,500 crore of fresh taxes. It’s useful to remember here what Sinha said right after the budget: "Somehow, the money has to be found. And we all have to pay our share." Add to that what economic affairs secretary C.M. Vasudev said and you get the general idea behind the budget. In an obvious effort to defend the obscene deployment of so much money—especially after RBI governor Bimal Jalan had warned against it barely a month ago—Vasudev said: "If everybody wants to have this kind of expenditure, and which is supposed to be good expenditure (plan investment), then how does one strike a balance? If you look at the big picture, then you’ll see that that’s all we’ve tried to do."

This is where the confusion is in full play. On the one hand, North Block has this pan-American strategy of trying to make people look beyond assured return instruments to save, take risks and even spend. On the other, we’re strongly reasserting our belief that staid public sector investment is best, even in areas like urban reforms and agriculture—that’s somewhat the China way. Call it globalisation of North Block?

Trying to please everybody is what Indian FMs have been famous for. And in a year of very limited resources and still more limited manoeuvrability, Sinha can probably be forgiven for trying hard and still slipping. But let’s look at the pluses in the budget. And surprisingly, there are quite a few. Says Sanjiv Goenka, president, CII: "What the FM has delivered is an achievable budget recognising the ground-level realities and the situation. There’s no point announcing measures without being able to achieve it. It’s a more focused approach."

The FM has taken some significant steps in the path towards capital account convertibility—it’s a pity they have been ignored in the tax furore. And NRIs now have everything going for them (though why they should at all want to come back to India is something to wonder about!). In agriculture, futures trading in all commodities is something to look forward to, and products will now move unrestricted all over the country, rejuvenating the rural economy. Says CII’s Das: "You will get growth from agriculture and infrastructure. We did a quick analysis and saw that he has done major work in 23 different areas of agriculture. If the agriculture economy picks up, it’s going to make a 2 percentage point difference in growth and it’ll just take us from 5.4 per cent to about 7 per cent. It’s still a huge part of our economy and a lot of it is hidden."

There’s also a nice little package for the textile industry and major incentives for hotels and tourism. But completely ignored are the mountain of grain (has it all rotted?) and customs streamlining—so what if the peak rate has come down to 30 per cent (painfully slowly)—we still have 14 more rates ranging from 182 (the 210 per cent liquor duty has now come down to 182 thanks to the WTO) to 5. And as former CBEC member Sukumar Mukhopadhyay points out, "We now have 15 rates compared to 13 in 1991-92." Even in excise, there’s not much of streamlining. Says Subodh Bhargava, chairman, Wartsila India: "The budget is a non-event but to me, it’s natural. What is disappointing is that under the heading of rationalisation, actually there is de-rationalisation. There is the introduction of new excise rates at 10 per cent and 12 per cent which is quite the opposite of the direction which the FM has indicated—that there will be two rates in two years’ time." Adds Arvind Panagariya, professor of economics at the University of Maryland, "The budget is in the right direction but would not move fast enough. Why not a more bold move and go for 10 point cut in customs? There’s a movement toward reforms in agriculture but again the pace is very slow. On FCI and ECA it doesn’t go far enough. The same with ssi reservation. Even after five years, we dereserve 50 items? Why not 750 items at one go? How will our exports catch up at this pace?"

Then there are the usual Sinha promises: 12,200 state jobs to go by March-end, about one-fourth of the surplus pool identified by the Expenditure Commission. And a hybrid pension scheme with a dual benefit that combines contribution from employees and the Union government will be put in place by June 2002. Much more was expected on this but the government has probably set up another committee. The pension business in developed markets is a huge 30 per cent of the total business of asset management companies. Among other budget declarations: many boards and new corporations will be set up. Many new bills will be formulated (but when will they become law?). Ports will be corporatised, airports will be privatised, and other promises the likes of which he has been making every year but over the implementation of which he seems to have little control. Asks R.S. Lodha, FICCI president: "The timetable for implementation is important. The government had spoken of labour reforms a year ago and all we still have is a ‘cabinet approval’." Adds R. Seshasayee, MD, Ashok Leyland: "It’s a ‘low-risk, low-return’ effort and hence may make a mildly positive impact on the economic growth rate. The budget, however, articulates a bold plan for globalisation."

There’s another worrying aspect to the budget. In April 2000, Sinha announced a 10-year tax holiday for software exports. Twenty-three months later, he has quietly gone back on that and reduced the exemption to 90 per cent. In last year’s budget, he suddenly imposed a punitive excise on garments (para no. 114). This year, he has, as suddenly, lowered the excise (para no. 115) to even below his stated benchmark of 16 per cent. This sort of thing gives the regrettable impression that one, you can’t be certain that Sinha will stick to his word, and two, that he is amenable to lobbying.

To come back to the larger picture, even if growth doesn’t happen in the short run, this budget’s impact may carry on into the long term. As Alok Vajpeyi, CIO, DSP Merrill Lynch Investment Managers, says: "We believe that a revival in the global economy is likely in the third quarter of 2002, which is bound to have a positive effect on our economy. Seen in this context, the FM’s focus on infrastructure will pay off in the long run. It will also eventually bring back liquidity in the capital markets." And, of course, there’s the huge stimulus to the oil economy, which becomes a part of the budget from this year. In reality, most of the taxes—about Rs 6,250 crore (of which about Rs 2,500 crore comes from only ONGC. Talk about milking a cash cow!)—are coming from this sector, an unavoidable step as the government has decided to absorb the subsidies on LPG and kerosene for a few more years. Even the oil bonds are slated to come by next month. It’s a huge unknown, as is agriculture, and their twin impact on the economy may open a Pandora’s box. Perhaps the average Indian may get busy before the global recession ends. Let’s keep our fingers crossed.

Paromita Shastri With Arindam Mukherjee, Arijit Barman, Gauri Bhatia in Delhi andCharubala Annuncio in Mumbai