Looking For A Pick-up Pill

FOR a much-battered finance minister, it was the fastest denouement ever. On June 30, barely a month after the Budget, a disillusioned and pampered industry accused the government of placing economic reforms on the backburner. FICCI president K.K. Modi, a champion of the government’s economic policies, also said the inaction was affecting investor sentiment. The next day, CII, the brain behind the new special additional duty (SAD) on imports, joined in by refuting Yashwant Sinha’s claim that industrial growth was reviving and there could be a turnaround. There are no signs of a pick-up yet, and Sinha might have just wanted to boost sentiments, said deputy director M. Roy.

For all Sinha’s tough talk and show of confidence, sentiments have just refused to look up. As noted freetrader Jagdish Bhagwati said recently, "Economics is not a matter of assertions...it’s a hard mistress." Net FII outflow has touched around $210 million. For the past three consecutive months, they have been net sellers. Thanks to Moody’s downgrade and the rising political risk factor, overseas credit charges have hardened from 10 per cent to 14-15 per cent. Should fresh multilateral aid dry up next year, in case the G-8 hardens its stand because of lack of reforms, India faces an extra interest burden of $75 million on a total foreign borrowing of $7 billion, estimates Congress’ economic cell secretary Jairam Ramesh.

The markets though, are a little better off. The rupee has stabilised, if one can call it that, above 42.5 to a dollar, probably because "the temporary mismatch of demand and supply", as Sinha described it, has run its course. And the stockmarket slide has been contained almost single-handedly by a supreme sacrifice by the UTI, forget its investors for the moment. Admitted a senior finance ministry official: "So far, there’s nothing that holds hope for the Budget. There’s a lift in advance corporate tax collections, and income tax anyway starts picking up from September, but in indirect taxes, there’s still nothing to be happy about."

Stung by the adverse mood, the government has finally woken up to damage control. A reform review committee has been set up with finance secretary Montek Singh Ahluwalia as chairman. A slew of policies to boost foreign exchange inflow is in the offing, in four areas: Clear as much foreign direct investment (FDI) as possible, boost exports (rupee devaluation has anyway done half the job) of software through tax incentives, flag off public sector disinvestment and restructure, and rev up capital market—speedily introduce buyback of shares through a special amendment without waiting for the cumbersome process of reframing and passing the Companies Bill.

Clearly, the government is moving towards a supplementary budget, most likely preceding the busy season credit policy in October. The actual adjustment of numbers—and revised income and deficit estimates—should come then, especially since Sinha has expressed his disregard for year-end window-dressing. But the finance bill that sails through on or after July 17 could well be far removed from the one that was placed before Parliament on June 1. By buckling down speedily on urea price hike and SAD, the government has already proved that it yields to pressure easily. How many of these policy measures, then, will sail through?

TO the credit of the government, it is moving speedily on the FDI front. It has cleared several FDI proposals in infrastructure—some major power and telecom projects and a $600 million project by GDF of France for LNG transportation terminals. It has also flagged off several oil exploration jobs for foreign firms. Industry minister Sikander Bakht has hinted at restricting compulsory licensing to only strategic areas like atomic energy and widening the automatic approval list to include ports, roads and biotechnology. (Which means a simple RBI nod should be enough for a project with a foreign investment component.) He has also said the higher the amount of FDI involved, the faster would be the clearance.

But the problem that plagues FDI is more administrative than clearance. Sinha should know, that’s one of his pet grouses. So, inflows remain small compared to the total FDI cleared, about 21 per cent. In infrastructure, where procedural bottlenecks are maximum, investments huge and public sensitivity high (remember Enron), the proportion is even smaller. According to one estimate, out of cumulative FDI approvals of Rs 46,000 crore in energy, inflow till May was Rs 2,600 crore; in telecom, inflow was only 10 per cent of Rs 30,000 crore of approvals.A better confidence-booster, both for tiding over the revenue front and revving up capital market, is PSU disinvestment. Especially if, as Bakht has said, a decision on strategic selloff/selloff after restructure of 107 units, and not only four, is taken. It won’t be an easy decision, especially with the government yet to muster majority in both houses. But the effort will impress investors and policy-watchers abroad, who feel that a change in ownership in public sector, not small sales to collect revenue, is the right approach. And that’ll also revive their hope in India’s capital markets. For investors and their guardian angels like Moody’s, the big disappointment in the Budget was more sectors weren’t opened to FDI, especially insurance and real estate. Some big money could have flowed in, but the government is determined to remain swadeshi in those areas. Then, it made things worse by slapping a countervailing SAD, sending a highly protectionist message to the world and making, in some cases, inputs liable to a higher tax than the fin-ished product. Will the government climb down further here and scrap it altogether?Fat chance. Forget the swadeshi philosophy, sheer economics will make sure that the government can’t do anything of the sort. Says a finance ministry official: "When it comes to Budget-making, ground reality counts more than philosophies. A Budget is basically a statement of intents. The finance minister’s success lies in effecting those proposals and fast." For instance, the securitised power bonds (converting Rs 10,000 crore of state electricity boards’ dues with companies like Coal India and NTPC to cheap bonds and selling them to banks with government guaranteeing repayment of principal on maturity). And the bonds for NRIs. Or even the Rs 72,002 crore of ‘kickstart’ plan investment. None of them have materialised yet, and may not for some time more. The first scheme is progressing fast,thanks to Sinha’s personal interest in its novelty, but most of the Budget proposals may see the light of day only after half the year is through.

Says a Planning Commission official: "The kickstart is really the key to the Budget, both in terms of expenditure and revenue. That’s make or break." There’s another worry, too. Rupee depreciation. The Budget factors in an exchange rate of Rs 39.5, there’s already a 7.5 per cent depreciation. What happens if depreciation touches 15 per cent by year-end? The rupee, after all, is linked to the global economy and with Asia entering a deep depression, it may flip-flop in tandem with trade partners’ currencies. The bright side: exports gain handsomely, internal debt is down, customs revenue looks up even when oil imports are down. Flip side: excise and direct tax collections go down, external debt is marked up (over two-fifths of our debt is dollar-denominated) and the government is forced to borrow and spend more. Will the kickstart work then? Remember, even after a 20 per cent hike, plan spending is Rs 3,000 crore less than interest payments on old debt.