Mantra Offline

Make no mistake, Mr Yashwant Sinha is a very unhappy man nowadays. Unhappier than the Dalal Street broker losing sweat over the Sensex shrugging off 300 points on Budget day. Gloomier than the company boss griping about the doubling of dividend tax. Unhappier than the exporter losing his most privileged status. Sadder than the farmer crying over the 15 per cent urea price hike. Darker than the black-suited television experts pontificating on how the 5.1 per cent fiscal deficit actually implies 7 per cent.

And definitely more clueless than the poor apl (above-poverty-line, which doesn’t mean "affluent" by a long shot) family on the sudden turnabout of events. On February 28, all was well with the world; Hanif the rickshawpuller, who is apl, was buying ration-shop rice at Rs 3.50 a kg and Sinha was about to present his third budget in a row, a rare distinction in this coalition era. The next day, all hell breaks loose, Hanif has to spend Rs 12 per kg, and the FM suddenly finds himself on the defensive on each of his "landmark" new initiatives and trying to be a walking explanatory memorandum at dozens of briefings and face-to-faces.

Is Budget 2000 so bad? Not really. Is it good then? Certainly not. Is it then a mixed fare? Actually, it’s vintage Sinha, here a little, there a little, no big ideas, plenty of stuff for gaon hamara and infrastructure, many thanks to the prime minister, lots of good intentions ruptured by the allies, and such a general effort to be fair to all economic constituents that post-budget, everybody is left feeling as if a bad molar has just been pulled out. For all its tough talk, the Millennium Budget remains sadly, just a budget.

No wonder industry and economists are depressed. The initial reaction was confusion, and some more confusion. That’s because clearly, the largesses are perfectly matched by withdrawal of benefits (see Treat or Trick). Even the soft-spoken Narayana Murthy, Infosys chairman, was groping for words: "My attitude is that we’ve fallen this time but we can get up, dust our knees and start running again. We’ll continue to support the FM." Others were less kind. "There’s nothing in it for us to dance all the way home," snapped Rahul Bajaj, cii chief.

Former FM P. Chidambaram took the promises to cut expenditure with a pinch of salt, nipep director Ashok Lahiri feels India will join the august league of countries like Liberia with one of the highest fiscal gaps, and icici ceo K.V. Kamath felt though the government had the ideal opportunity to wash down the bitter pill of disinvestment, it preferred to delay the inevitable. Manmohan Singh summed it up, saying the budget has many things, but at the end one doesn’t have a clear idea where it’s all heading.

What’s the big idea?

Precisely. If there was one thing the millennium budget didn’t have, it was vision. Says Venu Srinivasan, tvs Suzuki chairman: "I don’t see any path-breaking effort to deepen or widen reforms." Forget the millennium, it didn’t even spell out what India was going to do in the next five years. Remove poverty, create rural jobs, build infrastructure, achieve high growth, but how? Just by skating on ice (infotech-communication-entertainment), which looks thin today?

Sinha says he has a growth strategy: strengthen the rural economy and traditional industries, declog infrastructure, nurture new knowledge-based industries, raise exports, give top billing to HR development, and implement fiscal discipline. But as one goes into the budget, it’s clear he’s using all this as an excuse for what he calls the "hard decisions", which is mostly raising resources. The budget raises Rs 8,000 crore in new taxes, Rs 5,080 crore of them in direct taxes - a doubling of dividend tax on companies and debt mutual funds, five-year phased removal of exemption for exporters, mat for all zero-tax companies, hike in personal I-T surcharge and special import duty extension to traders.

This is laudable, since after a long time, the ratio of direct taxes to total tax revenue is a high 36 per cent, or 3.3 per cent of gdp, compared to the nadir of 2.2 touched in 1997-98. Even the simplification of excise to one single 16 per cent cenvat (Central value-added tax) is a small step but big in intent. These are perfect strategies to correct the resource bias, except for two reasons. One, that Sinha matched it with a 17 per cent hike in excise revenues, compared with the revised estimates in 1999-2000. Second, and more important, criticised for the dividend and export taxes, Sinha pleaded he was forced to seek new avenues to meet the sudden demand for an extra Rs 25,000 crore for defence and grants to states. There goes the strategy argument.

Spend now, pay later

Sinha also uses the same argument to defend the high fiscal deficit (FD) in the budget - in 1999-2000, he conceded defeat by allowing 5.6 per cent, a record even in the liberal ‘90s. Lop off Rs 25,000 crore, and you have a 4 per cent FD. The argument would have been acceptable if he had not used it as an excuse for being soft on taxpayers. He says he preferred to keep the FD high so as not to raise the tax burden. What about cutting expenditure? It looks like when Sinha spoke of a budget as one that "bites the bullet", he meant a budget that asks everyone to bite the bullet and pay more taxes so government can blow some more money.

The Centre has been walking the wild side for some time - last year, the revenue deficit touched 3.8 per cent. At the same time, capital expenditure has dipped from 23.7 per cent in 1993-94 to a dismal 16.7 per cent in 1999-2000. If asset creation decreases at this rate and government continues to spend more and more on its upkeep, it can have disastrous after-effects on the millennium economy.

The ballooning expenditure will necessitate a record borrowing programme of Rs 1,17,000 crore. That’s a minimum of Rs 5,000 crore every 14 days! Even here, the budget reflects no clear strategy. By abolishing the interest tax and taking a point off the general provident fund interest rate, a signal is sent out to soften lending rates. But already, money market circles are scared stiff that such a huge programme will crowd out private borrowing and harden interest rates. Even Sinha has done his bit by saying that a bank rate cut may be difficult now. So much for retiring debt!

How can Sinha cut expenditure? He hasn’t touched the main elements - interest payments are set to rise Rs 10,000 crore next year, salaries and pensions of course get higher thanks to the war, and defence allocation goes up by almost a quarter in real terms - an amount that equals what the government expects to spend on all, yes all, the social sectors in 2000-01-and remember this year’s budget has a special emphasis on rural demand generation. As for the fourth component, Sinha would desperately like a pat on his back for the oh-so-hard cut in subsidies.

Grains of truth

Let’s dwell a little on the subsidy issue. apl families will pay the "economic cost" for food - a steep Rs 12 for rice, Rs 8.40 for wheat and Rs 12 for sugar (the last item for those not paying tax - how does the finance minister plan to ensure that? Will Indians now have to apply for a ration card with a declaration?) Effectively, the finance minister is asking everyone above destitute level to go to the market where grains would definitely be better if not cheaper. Wouldn’t a plain food stamps system for daily wage labourers have been better?

Also, has Sinha tried to find whether Food Corporation of India’s (fci) economic cost is justified? With no attempt to reform fci, the whole proposal looks suspiciously like getting the poor (and apl doesn’t mean you are not poor) to pay for its ridiculous inefficiencies! The tragedy is, even after this 75 per cent hike, Sinha loses the food subsidy outgo battle by hiking the grain quota from 10 kg to 20 kg for bpl (below-poverty-line) families. If the idea is to reduce fci’s holding costs by allowing it a spring-cleaning, wouldn’t that be better done by paying the wage labourers in grains and not money?

The only reform here is that issue prices are being linked to the Minimum Support Prices (msps) and can be revised effortlessly by the food and finance ministries every year or whenever the prices go up, saving the usual pandemonium in Parliament by our so-concerned-for-the-poor politicians. That’s a master trick by the finance minister, but to give credit where due, the decision had been taken by Deve Gowda’s cabinet back in 1996.

As for fertiliser, a 15 per cent urea price hike translates into Rs 30 per 50-kg bag and will save Rs 1,250 crore in subsidies, but is actually much less than the Re 1 per kg (Rs 50 per bag) hike proposed by him and rolled back in 1998. Also, says economist Ashok Gulati, instead of tinkering with the prices of common fertilisers used by rich and poor farmers alike, a vastly effective way of tackling the subsidy problem would have been to abolish the retention price scheme altogether. Sinha just promises a roadmap for phasing out the scheme, which benefits only producers and not consumers.

A big growth gamble?

To be fair to Sinha, there are some more hard decisions in the budget, taken in the face of allies’ pressure: deciding to sell off dead psus’ assets, taxing exporters, even of software, flagging off bank privatisation (we waited nine years for it!) and cutting peak customs rate. Of special interest is the rural sector package which, if it works, will certainly help in inequity removal. Of course, say North Block sources, we should thank the prime minister more for it.

Even so, Sinha’s great gamble for a 7-8 per cent growth with 5 per cent inflation won’t pay off. Especially with only Rs 10,000 crore of disinvestment. Especially if interest rates are not brought down considerably and soon enough. There are significant inflationary pressures on the economy and it’s too much to expect the manufacturing sector to absorb them all. How long can we go on depending only on agriculture? One comforting thought: marked for the wastebasket next year are the special excise rates, fertiliser retention prices, one more customs slab and sick banks.

Sinha has been a lucky FM. His budget might just be digested by an economy on the rebound, with help from a surging new information-age economy which is attracting phenomenal global eyeballs and capital. But by ignoring the fiscal problem, Sinha has admitted defeat before the bell. Instead of the nit-picking with rules and regulations at the fringe, what was needed was a few bold brushstrokes of reforms. There’s still a long way to go, Mr Finance Minister, as the poem that you quoted during the Budget speech asked, kahan tak chaloge kinaare kinaare?