The Twice Born

A year as finance minister has greyed Yashwant Sinha dramatically. His head, merely speckled with white at the time of his first Union Budget, is now uniform snow. The stress of being in the North Block hot seat at a time of particular uncertainty and gloom must have contributed. His repeated statements that industrial growth would revive, soon, next month, in a couple of months, very soon, have not proved true. As the government has lurched from one crisis to another, the economy has sputtered and stumbled. The many policy decisions that should have had some positive effect have sunk without a ripple. The most-often-asked question in the country today is how long this government will last. As Sinha prepared Budget 99, the fact that this was almost certainly the last Budget he would ever present would surely have preyed on his mind.

Strangely enough, the Budget he has presented does not look like one prepared by a fragile government on the brink of collapse. Instead, it's more like what a government confident of staying in power for five years would do in its second year in office: low on overt populism, high on income tax, with several programmes which will bear fruit only a few years from now.

It has left the experts confused. Reactions can best be described as"mixed ."It's a great job, says industrialist Rahul Bajaj."It's not a glamorous but a substantive Budget. I would give it 9 out of 10. But R. Seshasayee, managing director of another automobile major, Ashok Leyland, has an antipodal view."At the start of a new millennium, we needed a visionary Budget, he says."This Budget has no long-term perspective, it's just a 'here and now' Budget to tide over some of the immediate problems the government faces. It has nothing in it to give a push to the economy.

The bjp's allies in governance too have agreed to disagree."It's a good Budget and a common man's Budget," says Shiv Sena MP Madhukar Sarpotdar. But Telugu Desam Party supremo Chandrababu Naidu says that the Budget has taken only a few"feeble steps" when the challenges faced by the economy were substantial."I am satisfied, says Samata Party MP Digvijay Singh. But commerce minister Ramakrishna Hegde has expressed disappointment over"the shortcomings in the Budget with regard to export promotion.

On the Bombay Stock Exchange (bse), the Sensex opened firm at 3301.13 but later tumbled to the intra-day low of 3215.69 when the proposal of 10 per cent across-the-board surcharge on corporate income tax (translating to an additional 3.5 per cent) was announced around mid-session. It rebounded a bit later to close at 3399.63 as against the previous close of 3233.86, netting a big jump of 165.77 points, or a tad higher than 5 per cent. Only two Budgets since the economic reforms began in 1991 have had a better effect on the Sensex. In 1991, in Harshad Mehta's heyday, when Manmohan Singh kicked off reforms, and in 1997, when P. Chidambaram slashed taxes, the Sensex rose 6.5 per cent on Budget Day."Under the present circumstances, it is a good Budget, says bse broker Bhupendra Bheda. Investment analyst Makrand Mehandale terms it"positive ."The finance minister has not presented a very populist Budget, he feels. But prominent bse member Parag Parikh echoes Seshasayee by saying that Sinha's second edition lacks"vision .

The Budget as politics: What has Sinha wrought? The question needs to be examined politically as well economically.
The political first. Let there be no doubt about this: this is a"swadeshi Budget, as swadeshi as they come. Excise rates are down, import duties are up. This way, Sinha has tried to quell the open hostility between the hard right and moderate sections of the bjp. He's succeeded. For proof, look no further than hrd minister Murli Manohar Joshi, known for his hardline swadeshi views, who has called the Budget"a step forward , and says:"It is in the direction of my economic philosophy.

That statement could scare a lot of businessmen, but in the context of Budget 99, this may not be the case. Sinha has used a number of positive"swadeshi tenets that could well turn out to be good for the economy in the long term.

His proposals on rural and agricultural India-the first 28 minutes of his 115-minute speech-were straight out of rss economic policy booklets. By decentralising implementation of various rural development schemes to the gram panchayat level, Sinha is firmly following the rss belief that only the bottom-up approach can make a long-term sustainable difference to the lives of the rural poor (a belief the rss shares with Mahatma Gandhi). Sinha has decided to term 1999-2000 as the Year of the Gram Sabha, and for obvious reasons. Gram panchayats will implement micro watershed projects, will be allowed to borrow from the Rural Infrastructure Development Fund, will be involved in developing degraded and waste lands, will help supervise and implement the Targeted Public Distribution System. It will be involved in wage employment and self-employment programmes, in setting up healthcare centres and primary schools. Panchayat officeholders are going to be very busy indeed in the coming 12 months.

Nothing wrong with all this, in fact, quite the opposite, except that many gram panchayats are as corrupt as babus in social sector-related ministries."The benefits may never reach the target audience, fears Sukumar V. Shah, president and director, Mukand. However, Sinha has, at least in two cases, kept a check on that. In primary education, where he has set an extremely lofty target of an elementary school within 1 km of every Indian, the central and state governments will provide teaching material and other assistance, while it is the panchayats which will have to raise the cash and kind to run the schools for two years. After the school has functioned successfully for two years, it will be upgraded to government school status. In healthcare, the central government will provide funds to panchayats which come up with money to set up primary health centres.

Sinha's panchayat-obsessed strategies, though, could be seen as a clear attempt to gain political mileage. This, after all, is just the sort of stuff that cannot be opposed by any political party, and can be hyped to high heaven, come election time. Again, nothing wrong with that per se, as no sane finance minister will let the Union Budget be just an economic exercise with no political overtones. The question is whether the poor will really benefit from this. And the answer is at least a couple of years away.

To be fair to Sinha, apart from the panchayat schemes and an extra Rs 4,500 crore in fertiliser subsidies (to keep the Akali Dal and Haryana Vikas Manch off his back), he has produced a Budget remarkably free of any political overtones. All the more surprising given the precarious status of his coalition government.

The Budget as corruption-cutter: In a very significant move, which will possibly break the hearts of industrialists who owe their riches to their closeness to corrupt politicians and bureaucrats, Sinha has abolished government's power to grant ad hoc exemptions of excise duty, except for goods of a strategic nature or for charitable purposes.By slashing excise duty slabs from 11 to a mere three, and customs duties from seven to five, he has simplified the lives of every businessman in the country and brought much-needed transparency to the whole taxation system. This is a straight attack on corruption and will make it difficult for future finance ministers to ever go back to the illogical and complex tax regime we have had till now. These are the three proposals in his Budget which are truly and unambiguously praiseworthy. Sinha also wants to set up an expenditure reforms commission to curb government expenditure, the biggest millstone round the economy's neck. Chidambaram too had proposed this, but did nothing about it. If Sinha follows through his words with concrete action, this could be a real step in the right direction. Says Bibek Debroy, director, Rajiv Gandhi Institute of International Studies:"As statements of intent, this Budget sends out many positive signals. Some proposals are very laudable.

But, says Debroy, the Budget has three glaring omissions."It has nothing to stimulate growth, the numbers don't gel-the new accounting method the government has introduced makes comparison difficult with previous years-and in terms of customs and direct taxes, it has sought to go against reforms for the first time in the '90s. The average basic customs duty will now go up from 31 to 34 per cent. This, and abolition of zero customs duty, will hurt the capital goods, steel, chemicals, pharmaceutical and agroproducts sectors, although domestic producers will continue to be protected. Others share his pessimism."This Budget is long on rhetoric and generalities, and short on action and specifics, says Anand Mahindra, vice-chairman, Mahindra & Mahindra."The silence in this Budget is deafening. There's no effort to revive the economy, says ficci president Sudhir Jalan."The more one looks at it, the more disappointed one gets, rues G.P. Goenka, chairman, Duncan Goenka.

The Budget as Sensex-booster: Why, if these readings are anywhere near correct, is the Sensex up? For one, no one expected much. While a motley crowd of industrialists organised by cii waited for the TV to be tuned in to the Budget telecast on the 21st floor of Mumbai's Hotel Taj Intercontinental, the India-Sri Lanka cricket Test match appeared on the screen for a moment. Quipped Pradip Madhavji, chairman of Thomas Cook India:"Since we're going down the tube anyway, we may as well watch cricket.

Madhavji's joke reflected the I've-come-prepared-for-the-worst mood of industrialists sitting down to watch the Budget across the country. It also explained the conspicuous absence of any groans and expletives during Sinha's speech. A remark by Ajay Srinivasan, managing director, Prudential icici Asset Management, after Sinha had finished, probably encapsulates what a lot of businessmen felt."Nothing to disappoint here as the markets did not expect much, said Srinivasan."Nothing much to cheer either. But the fact that it was not as disappointing as Sinha's first Budget seemed to be enough to enthuse the Sensex.

But there were several concrete reasons too. By fully exempting from income tax all income from the Unit Trust of India and other mutual funds in the hands of the investors, Sinha has given a strong fillip to stockmarket sentiments and also given industry hope that the equity markets will now revive so they can raise cheap money for their projects. This is what Sinha's strategy is: the income tax exemption will bring the small investor back to the stockmarket through the safer mutual fund route.This will encourage corporates to approach the primary market again to raise money for expansion. With the markets down, companies have been forced to rely on debt to fund their activities, rather than cheaper equity. This will no longer remain the case. Even otherwise, cash-rich companies which have no new projects planned right now will be able to park their money in mutual funds and offset the higher corporate income tax that Sinha has imposed on them.

The lowering of long-term capital gains tax on share transactions from 20 per cent to 10 per cent, allowing nris to trade freely on Indian stockmarkets and clarifying the confusion on mergers and acquisitions, share buyback, employee stock options and sweat equity have also cheered the markets.

The Budget as depressant: The question, however, is: why has Sinha tried to revive industrial growth through a secondary mechanism like the stockmarket, instead of tackling the problem directly? Why not give a powerful push to industry and let the stockmarket follow, rather than the other way round? In fact, by raising corporate taxes, Sinha may have sent a wrong signal to the world, that India is turning its back on the economic reform agenda.

Even though a lot of analysts had predicted that the Budget would raise corporate income tax, many industrialists are incensed at the higher tax rate-the across-the-board 10 per cent surcharge takes the effective rate up to 38.5 per cent-and point out the fallacy of first acknowledging that companies are in trouble and then going ahead and imposing extra levies on them anyway. Says industrialist Y.K. Modi:"The increase in corporate tax is going to impact the bottomlines of companies straightaway. This will reduce their P/E ratios, and stock prices will come tumbling down. Amit Mitra, secretary general, ficci, agrees."We were hoping it would be a watershed Budget to rejuvenate industry as we go into the next millennium, he says."But it hasn't met expectations. The surcharge on direct taxes came as a great disappointment, because it is a reversal of the trend. In fact, we were hoping that he would reduce them further. This will have an effect on capital markets, the profitability of companies and on the savings rates of households.

Some others, though, have accepted the higher tax rate calmly."Nobody likes to pay tax, but given the fiscal situation, the surcharge on corporates is understandable, says Bajaj."The sensible guys should welcome this as a time has come for us to look at it in a macro perspective rather than our own narrow or should I say specific interests."Given a Budget with a deficit, there were limited choices, says broker Parikh.

"I didn't expect much out of it but it has turned out to be an excellent example of good craftsmanship, muses economist S.L. Rao."His figures look credible. The economy is in bad shape and under these circumstances, the figures are extremely credible. Says an optimistic Sunil Bharti Mittal, chairman, Bharti Enterprises:"I believe the economy has bottomed out. This Budget definitely won't make it worse. I believe that people are underestimating the energy that will be released due to the changes in excise and customs.

The Budget as timidity: Let's hope Mittal is correct. Since, there seems to be nothing else in the Budget that aims to specifically boost industrial growth, currently languishing at 3.5 per cent. Industry was looking to Budget 99 to announce an interest rate cut, but that has not happened. Finance secretary Vijay Kelkar shrugs that off by saying that that's the Reserve Bank of India's job, when it announces its half-yearly credit policy.This is technically true, but Manmohan Singh had cut interest rates in his 1992 Budget, and it's high time the rates were cut to reduce industry's borrowing costs. By taking this bold step in the Budget, Sinha would, if nothing else, have endeared himself to industrialists of all hue. Hours after he presented the Budget, Sinha hinted in a television interview that interest rate cuts were on the anvil. So why not now?

There is also nothing specific to raise foreign direct investment (fdi) except a promise to expand the list of industries where investment proposals will get automatic approval, and a promise that the Foreign Investment Promotion Board will decide on all proposals within 30 days. There also doesn't seem to be any concrete steps to boost investment in infrastructure, except sops for the housing sector.

"If the Budget is all the policy that we'll see in the next 15 days, then it'll cause a lack of confidence, says ficci's Mitra."Sinha needs to take certain steps. He needs to reduce interest rates drastically, he must move to increase fdi flows, and make changes in infrastructure policy at the operational level. Focusing on interest rates will resuscitate industry.

Why did Sinha hold back on this, when everyone agrees that this was a vital measure? Is it his bureaucratic past that prevents him from going all the way? In both his Budgets, he has shown an irritating habit of giving with one hand and taking back with the other. He abolishes the special import duty but then raises customs duties. He tinkers with something here, but hedges his bets by doing some reverse tinkering somewhere else. He raises diesel prices, drops excise and sends companies to spend days poring over the fine print to figure out the impact on their product prices.

Caution seems to be the man's hallmark. Consider his current divestment target. Apart from some retrograde politicos and economists, all agree that disinvestment is good for the economy and for the people. Sinha has raised Rs 8,000 crore from disinvestments in this fiscal (though a very large chunk of it, admittedly, through financial jugglery and accounting entries rather than true privatisation). So why then is he targeting only Rs 10,000 crore in 1999-2000? Why not go hell-for-leather and aim at Rs 20,000 crore? One can only hope that in this case, the canny ex-bureaucrat would rather score brownie points by keeping targets low and then overshoot them by large margins.

Sinha has been candid on the grim economic situation India is mired in and on the various constraints he's working under. He hopes that the huge new tax burden that he has imposed-a record Rs 9,300 crore-will be seen in the light of this. He has, touchingly, admitted that he has not been able to control the fiscal situation (his two predecessors never admitted this, even in the face of incontrovertible evidence) and also that even with all these new taxes, he does not see the fiscal deficit going down immediately. He has promised a discussion paper in Parliament on what he calls a"second wave of reforms . He has taken care to emphasise repeatedly that he has looked further than the next six months to prepare his Budget, and that is clearly true.
If only he would go a bit further, faster.
The Budget as economic future: So what's the prognosis? Higher customs duties will raise the prices of imported raw materials that Indian industry uses. More expensive diesel will raise transportation costs. Lower excise will offset these to some extent. The tax measures to boost the housing sector should see some cascading effect on struggling industries like steel and cement in the second half of the next financial year.The stockmarket measures to buoy up industrial growth should also start giving results in six months' time. An interest rate cut will clearly come in April, when the Reserve Bank of India announces its credit policy, if not earlier, and that should help. A booming agricultural sector-and consequently richer farmers-should boost demand for goods, which should also give a fillip to industrial revival. Besides, the industrial recession may have actually bottomed out (see box), and quite independent of the Budget, things may begin to look up a bit over the next year on their own.