The Uncertainty Principle

The first reactions were fear, disbelief, exasperation. The BSE Sensex bolted 310 points down last Monday and President M.G. Damani was speaking for all when he said: "There's a genuine fear that some of the moves concerning the market may be altered by the next government." Snapped industrialist Rahul Bajaj: "I can't despatch the vehicles to my consumers. With the Centre preoccupied with saving itself, who'll negotiate the strike?" Rued Arvind K. Singhal, CEO of Technopak: "It's like putting a VCR on pause. Politicians are not bothered about the economy at all!" But industry was back on its feet the next day. The bid to save the budget—to ensure safe passage for Finance Bill 1997-98 before the confidence vote on April 11—had begun. Chambers of commerce bosses and corporate chieftains started their parleys with political leaders. FICCI President A.S. Kasliwal had two meetings with Speaker P.A. Sangma and "the response was favourable". The show of unity contrasted dramatically with the political chaos.

To its credit, the government did its own bit to shrug off the bad news. Exim Policy 1997-2002 was announced right on schedule the day after, a bonus for wheat growers declared, external commercial borrowing norms for corporates relaxed, and Rs 1,000 crore of foreign investment cleared. Industry Minister Murasoli Maran spent all of that Tuesday in his office clearing files. Petroleum Minister T.R. Baalu talked of a 20-year perspective plan. Chidambaram met the Speaker to explore the possibilities of rushing through the Finance Bill before D-day.

But things changed fast. On Thursday, the UF informed the Lok Sabha Secretariat that it was no longer interested in the Finance Bill. The reason, said Parliamentary Affairs Minister Srikant Jena, was that the standing committees were still going through the proposals and would not be ready with the recommendations till the first week of May. Clearly, the economy will now be the real loser in the continuing political gamble. As of now, nothing short of the Congress calling off the ambush can save Chidambaram's budget—whether a new-look coalition government comes in or India goes in for snap polls. The Congress has openly aired its dissatisfaction with the inflationary aspects of the budget and the sharp cuts in tax rates. So have the Left and the BJP. Let's consider the worst possible scenarios.

What happens to the Finance Bill?

SAYS Subhash Kashyap, former secretary-general of the Lok Sabha: "The main issue, if Gowda loses the trust vote or resigns, is what happens to the Finance Bill (the passage of which makes the budget law for all times)? But there is no constitutional crisis in that. All possible problems can be solved within the constitutional parameters." In fact, if the impasse is not resolved by the time the President's term ends (June 1997), the vice-president or the Chief Justice will have the power to take all parliamentary decisions.

The current vote-on-account (VOA), a proposal which takes care of government finances, is valid till the end of May. In the event of a mid-term poll, which cannot be held before July-August, the caretaker government will have to pass another VOA, probably for two months. There are precedents in India's parliamentary history when a VOA has been taken for three months too. In the event of a new government coming in without the present Lok Sabha being dissolved, which is well within the President's powers to order, this government will have the power to take up for discussion, change or scrap the Finance Bill and announce a fresh budget. According to Kashyap, by convention, if the same Lok Sabha continues with a new government, the old Finance Bill is usually passed with suitable changes. The timing is important in deciding this issue: if the new government takes over in the second half of the fiscal year, by convention, fresh VOAs are sought and a new budget is presented only at the end of the year.

A new government may also opt for passing the same Bill with minor changes. Said Narendra Nagpal, head of research at BZW: "Whichever combination comes to power, a possible mid-term poll will be at the back of its mind. So there could be some populist alterations, which won't affect the budget much." Interestingly, Kashyap elaborates, if an alternate government cannot be formed within the same Lok Sabha, and mid-term elections have to be called, the President can announce the polls and use his discretion to ask for the passage of the Finance Bill by the current government. The last two possibilities are obviously the best-case scenarios for the present budget. But what kind of changes can possibly be made by the new government that takes over before or after the elections?

What happens to tax rates and black money?

THE tax rates, especially for personal income, are the most sensitive areas in the budget. They are also the premise on which its success hinges. These two issues almost nullify the scope for major changes in the revenues side. Which finance minister will be so short-sighted as to take back tax reliefs from the corporates and households? If at all he decides to be, how does he match the receipts with the expenditure side in so short a time, without axing essential expenditure or resorting to heavy borrowing? The options are severely limited.

Says V.U. Eradi, former Central Board of Direct Taxes member and member of the Income Tax Committee: "Dr Manmohan Singh has always been lax on the expenditure side. Any roll back of tax cuts will affect the books. I think good sense will prevail in the Congress, if they come back to power, and they'll not change the tax rates." Agrees Rajesh Kapadia, Mumbai-based tax expert: "The personal taxation will probably remain the same, despite Manmohan's criticism." Adds Nagpal of BZW: "Presuming the worst-case scenario, the new government can tinker with the corporate tax rates which have been cut sharply. But that would be a highly unpopular move."

As for the loss of revenue owing to the Finance Bill getting stuck, most of the indirect proposals, being outside the bill, have already taken effect. The direct tax proposals anyway take retrospective effect, at whatever time in a fiscal year they are passed. But the grand Voluntary Disclosure Scheme (VDS), the finance minister's personal favourite, is as good as written off, as it has neither the support of the Congress nor of Manmohan who doesn't believe in the effectiveness of tax amnesty schemes.

Says Eradi: "A VDS is ethically unsound and financially impractical. It signifies the tax administration's impotence and a desperate bid to raise revenues. Also, the current scheme is badly drafted and would in no way have raised even half its target of Rs 10,000 crore. And it will be the easiest to scrap: the scheme is only a part of the budget speech and the notification to give effect to it hasn't yet been drafted." Agrees Nagpal: "The looming mid-term poll will scare the disclosures away, now that there's a question mark over the budget." Adds Dharam Vakharia, a stockbroker: "Elections are a source and raison d'etre for black money. The cash would rather be spent on campaigning." 

Unlike the VDS, the remaining budget proposals—new incentives for NRI and FII investment, guidelines for venture capital funds, new exploration policy for oil and gas, resumption of futures trading in cotton and jute, dereservation of items from the small sector, etc—are under no threat. Nor is the agreement on ways and means advances with the RBI, which is statutory and is the result of a process initiated by Manmohan. But more important than the numbers in the budget and the nitty-gritty to the economy is the demand side of the budget—industrial growth and buoyancy in consumer markets.

What happens to industrial growth and consumer markets?

OPERATION "Save-the-budget" is a desperate bid to salvage what industry sees as a milestone in the reforms process and a clear pointer to further liberalisation after months of inaction, by both the UF and the Rao regime in its last two years. At an interactive session on the budget organised by CII on April 3, where Finance Secretary Montek Ahluwalia was present, Maruti Udyog CEO R.C. Bhargava said: "The process of decontrol and lib-eralisation is not dependent on the political scene." Added Assocham President H.L. Somany: "There's no doubt that political parties would send the right signals to foreign investors by retaining the growth and thrust of the budget."

Thursday's discussion also reflected the optimism industry was trying to force down its own throat, about the fact that the reforms are irreversible. Said Alok Das, partner, Argus Advertising: "Just when the reforms had started moving and the economy was stabilising, this has come as a bolt from the blue." The Indian experience of liberalisation indicates quite the opposite: that despite two years of major dismantling of tariff barriers, the trade policy can settle down to routine tinkering. That even after a visionary budget by a finance minister, his colleague can turn around against foreign capital in an important infrastructure sector—aviation. Said the representative of one of India's largest business houses: "This is a transition period that leads to a slowdown. So this is holiday time for the bureaucracy. The budget had already flagged off a 15-day honeymoon. Now, through this political crisis, we are letting Moody's, which has put India on the 'watch' category, have the last laugh."

Marketers are the most worried lot. Says Singhal of Technopak: "With peak tax rates cut, the amount of extra money in the hands of buyers would be around Rs 2,000 crore. Even if 20 per cent was channelled into savings, Rs 1,500 crore would have flowed into the consumer markets this fiscal, most of it during the festive season. All that is uncertain now." Sales of white goods, for instance, may be the worst affected this summer. Rues V.H. Munshi, MD of Voltas: "The government expects to get more revenues from volumes as tax per unit is down. If the volumes aren't there, it will spell trouble for both industry and government."

What happens to the stockmarket?

THE seesawing sensex over the past week tells its own story. It had reached a high of 3,944 points on the "champagne" budget, but crashed to 3,360 at the time when the election results of BSE directors had just been announced. Says Damani: "Most of our demands like corporatisation of the brokers, double taxation on dividends, capital gains tax and other related issues had been cleared in the budget. Now, all our efforts appear to be in jeopardy." 

The sensex did recover by 100 points on reports of the move to salvage the budget, but there's no denying the fear psychosis that has gripped the market. "There is undoubtedly confusion among the brokers as to how much of the radical reforms will actually be cleared by whoever comes to power next," says Damani, adding that he'd already shot off a letter to the government requesting that it "rises to the occasion and let the budget pass, irrespective of the political equations." 

Damani and his colleagues have reasons to be worried. Daily turnover at the BSE went up to over Rs 900 crore per day last month from less than Rs 200 crore in March 1996. Target for the next year: Rs 2,000 crore per day "of which 40 per cent will be delivery-based transactions". By the end of May, 135 sites including Calcutta, Pune, Ahmedabad, Coimbatore and Mangalore will be linked to BOLT. "This is the time when we want the markets to trade flourishingly and not get hampered by political manipulations," says P.L. Banthia, treasurer.

Most brokers and market punters, however, are inclined to discount the dubious deals at Delhi. Says George Thomas, director, Fiduciary Capital, "We are soon heading towards a period when prime ministers can change every month, but the economy will go on. Look at Italy. It has one of the soundest economies of the world, but the prime ministers change every six months." Adds Nagpal: "The political alignment on April 11 is most likely to be yet another Congress-UF combination, which has an equal chance of stability as the present one. And the polls looming ahead may make it impossible for the new power brokers to mess around with the main budget proposals." 

All the same, brokers hope that the axe falls on some of the "unpopular proposals in the budget". For instance, the proposed tax on services, which stand to contribute over Rs 1,200 crore to the central coffers. Keeping the elections in view, marketmen feel, a populist government might actually declare some more sops and incentives to win the day.

What happens to inflation, i.e. prices ?

IRRESPECTIVE of whatever happens to the budget, the common man as usual remains the most affected. The truckers' strike has already pulled up consumer prices. In the event of a mid-term poll, they can only go higher. Similarly, any fall in revenue yield that results from further tinkering with tax rates will raise government borrowings and harden interest rates. The much-awaited relaxation of bank rates by the RBI is yet to take place. Inflation, which is already close to double digits, may well pierce the golden limit. Says Rajan Nanda, chairman, Escorts: "Political uncertainty cannot make a growing economy function." Sums up Munshi of Voltas: "A growth-oriented budget without growth can be a disaster. "

Even as industry keeps its fingers crossed that the economy takes precedence over the political chaos and the reforms remain untouched, the government remains confident that the crisis will blow over. Said a senior member of the ministry: "The credit policy will come after April 11." If that happens irrespective of the present government's continuing in power, the country would have achieved the ultimate reform.