Swadeshi Rollback

BOOED by the Opposition, buffeted by allies, pressured by every lobby in the country, Yashwant Sinha's first Finance Bill, when it comes up for voting in Parliament, may bear only coincidental resemblance to what he had proposed in his Budget speech on June 1.

First, Sinha gave in to Opposition anger over the petroleum price hike, and passed the burden on from the consumer to the oil pool account. Then came the farmers' lobby, led by BJP ally Akali Dal (Punjab farmers use 45 per cent of all the urea used in India), and the Re 1 hike in urea was forthwith cut down to 50 paise. And then, on June 12, Sinha finally threw in his towel and removed that 50 paise too, letting the exchequer take a Rs 2,000-crore knock.

But to Sinha, the unkindest cut of all must have come from swadeshi industry, which he had apparently tried to protect. But they too have turned against him, claiming that the budget measures could end up hurting rather than helping them.On June 12, Sinha slashed the controversial 8 per cent extra import duty—expressly meant to protect Indian industry, and introduced at its specific suggestion—by half.

How things have changed, in just two weeks time. Budget Day, June 1: industry leaders were beaming after Sinha announced the special customs duty to keep his promise of protecting Indian industry.Bajaj Auto chairman Rahul Bajaj, who was seen cheering—much like a diehard fan during a football match—as he listened to Sinha's speech in Delhi, gave the budget 9 out of 10. Confederation of Indian Industry (CII) president Rajesh Shah gave 7.5 and his predecessor Subodh Bhargava, 7. A very large section of Indian industrialists seemed delighted.

The euphoria fast changed to apprehension, then pure disenchantment. Industry leaders, having now read the fine print, have decided the budget is surely not as good as it was made out to be.

"There are very few strong signals given in the budget. That opportunity (to respond to the sanctions imposed after the nuclear explosions) has been lost," says Anand Mahindra of Mahindra and Mahindra. He adds that the negative effects of the budget were apparent from day one.

Complains Rahul Bajaj, one of the prime movers of the so-called Bombay Club which had sought protection for domestic industry: "If the issues of 5 per cent mod-vat and exemption to trading companies on the special customs duty of 8 per cent are not resolved, I would give the budget something between 6 and 7." Quite a climbdown for a person who rated the budget between 8 and 9, "but it got printed as 9." Compare that to what Bajaj had told Business Standard on the day of the budget: "There are very few negatives in this budget." Obviously, the fine print has caught him unawares.

PLACE these statements alongside a graph, since the budget day, of the slide in the BSE sensex. Even after the sensex has dropped by over 500 points, it shows no signs of bottoming out. Isn't the picture clearer now?

Bajaj's views are echoed by Subodh Bhargava, who makes it clear that his rating of the budget has not changed but "there are some very, very serious gaps" on the operations side. According to him, the 5 per cent disallowance of excise is "retrograde" while the 8 per cent customs duty has two serious lacunae. One, in view of the depreciating rupee over the last couple of months, industry did not need protection and, second, if the government had to accord protection to industry, it should have been 4 per cent since 8 per cent actually ends up becoming 12 or 13 per cent. Obviously, Sinha too now agrees with him.

Bajaj's and Bhargava's views assume paramount importance since the former has voiced a demand for protection to domestic industry while Bhargava has been known to say the opposite. So, has the budget not gone down well with both the camps? Surely, trouble is brewing.

Confirms Mahindra: "I sense that if there was any optimism in the business community, it is being questioned now." According to him, there is nothing swadeshi about this budget since it increases the cost of business and creates a climate of uncertainty, but refuses to be drawn into the rating game.

Says a Federation of Indian Chambers of Commerce and Industry official: "The depreciation of the rupee is one of the assumptions that no budget can make. It is precisely that which is making imports far costlier and hence the unhappiness of the industry." Asked if the rating of the budget would change in view of the changed circumstances over the last two weeks, he said: "I would not like to get into any rating of the budget."

 Even the CII is far from happy. Surprising, since it was the CII which had suggested an across-the-board 5 per cent additional import duty in its note to the finance minister. Though its president Rajesh Shah told Outlook that he stood by his earlier 7.5 out of 10 on the budget, he added: "On reading the detailed statement, we found that there were points which needed to be addressed as they have an impact on the domestic industry." And he maintained his careful diplomatic stance concealing his unhappiness when he says: "If the issues are addressed, our rating can only go up."

Says one industry leader: "In a country like India, sentiment is very important. Under these conditions, if the talk is negative, people tend to press the panic button." Much like what is happening to the rupee at the moment.

 Naturally, there is the expectation that these issues will be addressed. And urgently. Bajaj hopes that by the time the Finance Bill is passed by Parliament, the issues of 5 per cent modvat and exemption to trading companies from the 8 per cent special customs duty will be taken care of. (The special customs duty were rolled back on Friday,after Bajaj had spoken to Outlook.) Mahindra would rather have the special customs duty for select industries since it has raised the costs for several goods which have high import content.

Like Daewoo Motors. Says managing director S.G. Awasthi: "The cost of the car will go up by around Rs 35,000 because of the special import duty." This, when 70 per cent of Cielo is indigenised. His competitors in the mid-car and luxury segment, which have a higher import content, will be complaining even more.

Bhargava also believes that the provisions of the budget will have to be backed by political and bureaucratic measures, where there is a "fairly large question mark". Agrees Awasthi: "With such a large increase in allocation to the rural sector with the state machinery not geared up nor experienced enough for that, it will be a drain on the economy."

Fundamentally, there seems to be nothing much wrong with the provision since it has been the BJP's grouse that the agriculture sector has been neglected for a long time. Except that in the fine balancing act, if there is just a little slip, it has the potential to throw everything out of gear. The outlay for agriculture and also infrastructure should, to use the much maligned word, kickstart the economy. Industry leaders, however, fear that the retrograde steps, which have the potential of holding back the industry from its growth curve, will ultimately lead to shortages in revenue with its spillover to the fiscal deficit and inflation scenarios.

For the moment, every economic indicator is going in the direction it should not be going in. The inflation and wholesale price index graphs are going up, along with the chant for more sops. Others, like industrial growth and exports—which earn revenue for the country—are going down. Everything, it appears, is topsy-turvy.