How To Ride The Storm

FINANCE Minister Yashwant Sinha, many would say, is a man marked by destiny. The man who presided over gold sales by India to prevent the economy from going under, and who would have probably pushed through the reforms had his government continued, will also present "nuclear" and "swadeshi" India’s first budget in the shadow of political muscle-flexing in the continent and economic sanctions from the country’s biggest trade partner and investor. A perfect opportunity, many would also say, for presenting India’s first "bombshell" budget on the eve of the 21st century.

Will Sinha drop the bomb? Will he charge the infrastructure sector with investments, electrify industrial growth,unleash a flow of foreign capital, cut unnecessary expenditure and fuse the budget with a radical approach to reforms? Will he show the world, that behind the nuclear sabrerattling, there are some sound economic policies? Will he prove his description of himself as a pragmatic swadeshi?

N-tests the foundation?

The answers, as the song goes, are blowing in the wind. Come June 1, they’ll only be confirmed, say the hopeful. And there are plenty of them. Says Rahul Bajaj, chairman and managing director, Bajaj Auto: "The general direction of the budget will be positive without any extra hardship for the people." They argue well, too. Rajesh Shah, the new president of the Confederation of Indian Industry and managing director of steelmaker Mukand Ltd, for one. "Our priorities," he says, "have not changed. What has changed is the strength of the government and its ability to pursue these priorities. There’s enormous public support for the government at this time, making it the best time to get on with the economic agenda on all fronts."

That’s the crucial word here. Public support. And Sinha will need it enormously for he’s facing a set of equations that seem to be chasing one another like the dog and its tail. The BJP’s strategy of kick-starting growth hinges on infrastructure investment. Says N. Kumar, managing director, Sanmar group: "The government has to come back as a major player in industrial and social infrastructure in a situation where the private sector plays a supplementary role." Unfortunately, the coffers are empty. Capital expenditure has declined from 5.9 per cent of the GDP in 1990-91 to 3.4 per cent in 1995-96. Money, let’s face it, can be procured in only three ways: by borrowing, saving (spending less), and earning. Borrowing at home is not an easy option with a fiscal deficit (net addition to the debt every year) of Rs 86,354 crore, or 6.1 per cent of GDP, the second highest since reforms, and a monetised deficit (funds infusion through printing of notes) level of Rs 7,000 crore fixed in the interim budget. Will it be any easier abroad? Hardly, because the bilateral sanctions have increased India’s credit risk perceptions and lending rates have shot up.

Secondly, it’s tough to cut revenue and non-Plan expenditure, the vital components of which are subsidies, interest payments, defence expenditure and government wages. Subsidies have to be maintained to protect the poor, interest payments are a fait accompli, defence expenditure may require a boost with the heightening border tensions. As for wages, have we forgotten the not-so-silent army of two-million government employees who have just received a huge salary hike of Rs 12,000 crore? Instead of cutting non-Plan expenditure as targeted in his budget, former finance minister P. Chidambaram ended up raising it by 3 per cent, to 12. 5 per cent of the GDP.

Five per cent here, 10 per cent there

As for earning, the government has two ways: raise direct taxes and import tariffs, and make its public sector earn more—disinvestment, in other words. That’s highly feasible. Exhorts Rajive Kaul, chairman and managing director, Nicco group of industries: "The government needs to spend more. It can raise additional resources through direct taxes and customs duty." In the absence of any evidence of the Laffer Curve—if you lower tax rates, you end up collecting more taxes, the crucial assumption that Chidambaram made in his "dream budget"—actually working in the case of India’s tax revenues (most experts say more important than low rates are a wider tax base), a higher personal income tax rate or more slabs may make a comeback this year. As for import duties, perhaps a 5 per cent across-the-board special duty as imposed by Chidambaram in 1996-97 or perhaps a less harsh selective hike in import tariffs to protect some industries affected by the East Asian crisis might do the trick.

EVEN if the pervading nuclear euphoria makes for a climate suitable to imposing harsh measures and getting away with them, the cold water on such options is the limited effect of such tax measures. For, the amount of money involved here is huge. According to The India Infrastructure Report of the Rakesh Mohan Committee on privatisation of infrastructure, just the minimum expenditure in infrastructure would require a new investment, public and private, of Rs 60,000 crore this year. That’s hardly the kind of money Sinha can raise through taxes and duties alone.

Or even with disinvestment. The past record in this area has been dismal—did you know that even in 1991-92, when Yashwant Sinha presented his interim budget, public sector disinvestment was expected to yield Rs 2,500 crore? Of late, the failure has been more due to the sheer lack of economic will veiled by the overt excuse of "poor market conditions". Still, that’s an area which can fetch huge money, even foreign funds. For instance, the International Finance Corporation (IFC), the private sector financing arm of the World Bank, has already conveyed to the government its interest in public sector blue chips, whenever they are disinvested. So that’s an area Sinha can very well train his guns on.

The other thing that Sinha needs to do is to clear the cobwebs. In areas like removing excise duty anomalies and slabs, speed up administrative law reforms, clear pending legal changes like the Companies Bill, set up regulatory authorities in all infrastructure areas and not only power, and also reform rural infrastructure. Agriculture is another long-neglected area.

Long-term funds are key

But a budget needs to have a vision. Beyond laying out the spending and earning plans for the year, it has to chart out broad pathways on which the reforms can easily roll along in the future. And Sinha’s budget, even if it’s a path-breaking one, is already handicapped by coming in late in the year—by the time the initial impact is felt by industry, the first half will have already gone.

Nor do last year’s figures give any cause for optimism. Industrial growth hit a five-