Slipping Up On The Sixth Test

THE Budget has failed to spark any enthusiasm in Wall Street and financial analysts, academics and India experts are pronouncing it dead on arrival. "After Finance Minister Yashwant Sinha's visit here soon after the new administration's inauguration, and then the series of nuclear tests, we had high expectations from the new Budget," a Wall Street investment banker remarked, speaking privately to Outlook. "But the Budget is a big disappointment. The government blew it."

 "It's a colossal waste of time to look at the Indian market right now," says Hari Hariharan, who manages about $2 billion at Santander New World Investments in New York. "I don't think there is any constituency in India that is oriented towards the new, open-market economic policies sweeping across the rest of the world." Hariharan says he is slashing his holdings in India from 7 per cent of assets four months ago to less than 1 per cent.

The mood at the three top credit rating agencies too is sour. Standard & Poor's India expert Joydeep Mukherjee is heart-broken: "The government had a great chance to make far more dramatic changes but they simply didn't use that opportunity." He says the Budget allows the continuation of "ambiguity on how the government views external investments" and does not contain "too many specific policies to free up the economy". He questions the imposition of tariffs on imports—ostensibly to level the playing field for domestic industry—and says: "Some of India's infant industries have become senile industries after four decades of protection. Either they should be exposed to foreign competition or allowed a natural death; or be reborn through mergers and acquisitions."

Says Shelly Chaddha, primary analyst for India at the Duff & Phelps Credit Rating Company: "The Indian government apparently has not taken any major steps to reduce the high fiscal deficit. They didn't use the large political capital they had to initiate any bold steps. And we haven't seen any major expenditure cuts." Her agency is "reviewing" the Indian scene and may change its rating of India. Meanwhile, in a blunt statement, Moody's Investors Service has warned that it may cut India's key currency and bank ratings: "From the start, indications regarding the BJP-led government's position on such critical issues as trade and investment liberalisation were often contradictory. In addition, the mix of political parties and personalities that made up the new government seemed inherently unstable, raising the potential for yet another government transition."

Says Arjun Divecha, who handles emerging markets investments at Grantham Mayo Van Otterloo in San Francisco: "There's nothing wrong with the Budget. But it is simply more of the same. A year ago I would have said, yes this is a good Budget. It is just that given the new government and given the kind of stance they have taken, the expectations were that they would do something more radical, that they would have taken bigger chances, especially given the political goodwill they had earned within the country."

Says Marshall M. Bouton, executive vice-president of the prestigious Asia Society: "I think that there are lots of positive things in the Budget. The big thrust on the expenditure and investment sides toward infrastructure, agriculture, health and education are much to be welcomed. But against that are a number of weighty concerns." Bouton, who speaks Tamil with an accent, says the proposed expenditures are very large and "it's not clear that the revenue projection will come up to the mark so as to meet the fiscal deficit. And I do not see foreign direct investment being doubled as a result of anything done in this Budget. You have to do something lot more dramatic than simply improving the procedural environment."

Wharton School of Management professor Jitendra V. Singh shares some of Bouton's views. Says he: "My honest thought is that moves like raising the import duties actually make things difficult. If this notion of swadeshi, correctly or incorrectly, starts getting interpreted by players outside India as a move towards protectionism, howsoever weak the signals be, it is not in India's interest in the long term. In the long term, we must integrate with the world economy; we must end up with a set of firms that are competitively capable of playing with the top players of the world and hold their own. Protection is not going to get us there. This Budget does not send that signal."

Stanford University professor Rafiq Dossani warns that the numbers in the Budget don't add up: "My feeling is the government will be borrowing much more than it has targeted. This will result in the severe crowding out of the private sector and the interest rates will go to a real high level. The other thing I find very discomforting is the government's tendency to back down from what it promised to do. It said it was going to raise petrol prices and then next day Sinha said he was rolling it back. That doesn't give you a comfortable feeling about the finance ministry. The same thing has happened with urea."

In summing up his opinion about the Sinha Budget, Bouton reflects the opinion of many analysts in the US. "I'm kind of really puzzled," he says. "I don't quite get it. It all looks like sort of a jumble and one wonders who was really managing the making of the Budget." And a financial analyst, who asked not to be identi-fied by name, quipped: "After five spectacular nuclear tests, the sixth test—the Budget—fizzled. And that's a tragedy, I think."