Who Have You Helped, Mr Sinha?

JUNE 2, the day after the government presented its first budget. Scene: Parliament. Pandemonium rules, eminent members protest the petrol price hike of four rupees. The finance ministry is taken aback. The hike was supposed to be one rupee and one rupee only, it mutters. The petroleum ministry is miffed: how can the oil pool account, headed towards extinction next year, absorb such a huge burden? Towards afternoon, the impasse is patched over. The junior ministry takes the blame, the consumers take a Rs 9 crore hit in the abdomen, and the senior gulps down an uncomfortable excise loss of Rs 730 crore. That's 8.7 per cent of the total indirect tax hike. Also rolled back, thanks to arm-twisting by the weighty farmers' lobby, is a decision few had dared to take so far: a hike in urea prices. Result: revenue deficit goes up from 3 per cent to 3.2 per cent.

Two days later, on June 4, a bold electricity reforms bill is moved. Similar cacophony ensues over the conditions crucial for the health of SEBs and ensuring private power supply—forcing states to set up regulatory commissions and reimburse the boards for subsidies over 50 per cent of cost. The offending clauses will now be removed.

Wasted opportunities, short-term political gains. That's Budget '98. Post-Pokhran II, post-Chagai, the time was just right for the BJP government to carry reforms forward, slash borrowing, unveil innovative schemes to attract growth-propelling investment, launch indirect tax reform, cut red tape, and raise hope across the country. For a bold, pathbreaking, visionary budget that would show the world this government meant business and would get on with it, sanctions notwithstanding. Instead, Yashwant Sinha defensively delivers a cautious, confused, indirect-tax-dependent, inflationary, debt-booming, that's-all-we-can-do-right-now budget.

That's sad. For the first time since reforms, the bureaucrat takes precedence over the economist, putting together a mixed bag of insignificant benefits, significant burdens and mismatch of philosophies—protectionism instead of swadeshi, paranoia instead of self-reliance and regression replacing progress.

With its heavy reliance on indirect taxes, high prices and unaimed funds infusion, this budget is effectively a throwback to the seventies, when the government was the big daddy helping its poor children, read vested interests.

Not surprisingly, industry is confused. The initial euphoria has given way to guarded optimism. Rahul Bajaj, self-declared champion of the swadeshi lobby—also called the Bombay Club—started out with a nine-out-of-ten score and sheepishly revised it to about seven three days later. If, according to Sinha, growth is a function of confidence, that's still absent. Says former finance minister Manmohan Singh: "This budget doesn't do enough to strengthen the confidence of the consumer, industry or investor." The rupee has fallen further and the stockmarket has been plummeting, with for -eign institutional investors steadily selling their holdings.

The mood is even more downbeat abroad. GDRs are selling at a discount. Consultants Ernst & Young have predicted a possible balance of payments crisis following 9.5 per cent inflation—domestic experts even fear double-digit—with 6.5 per cent average growth rate for the next decade. Moody's, already dissatisfied with "contradictory statements on liberalisation" and "unstable coalition", has hinted at a downgrade; Standard & Poor's doesn't rule out a rating "downgrade if sanctions pinch". Understandably so. The budget doesn't have a single measure to boost forex inflows (other than NRI schemes which will finally end up very expensive for the country): exports are royally ignored and there's nothing new or concrete to attract foreign direct investment. To cap it, despite sanctions and World Bank loan deferrals, the budget assumes net foreign aid will double to Rs 2,337 crore!

This budget is a new government's first major policy initiative and a mirror to the world. Judged from that yardstick, it's quite a struggle to find a constituency that significantly benefits from this budget. Even the BJP's votebanks like business and trade and the urban middle class have a lot to cavil about. As for the new lobbies—the poor, the farmer, the small-scale entrepreneur, the exporter—what have they gained, finally? Zero.

For farmers and rural poor, short-lived euphoria: Even the worst sceptics have welcomed the thrust given to agriculture, which received a 40 per cent hike in central plan outlay in this budget. Says economist S.P. Gupta: "It corrects a long-unaddressed bias against agriculture in the reforms process." The budgetary allocation is up as much as 54 per cent, irrigation allocation 45 per cent. But despite Sinha's rhetoric, this sum is woefully puny to address the water problems in the 63 per cent of the agricultural land which is rainfed.

Sinha has also launched several innovative schemes like self-help credit schemes for micro enterprises, repayment default waiver for deserving farmers so that they don't have to commit suicide or go to prison, kisan credit cards for input and other purchases. More, more, more of the same. By announcing more credit schemes, Sinha has virtually thrown unlimited and free government credit open to farmers—most of whom, in reality, will be undeserving borrowers—when it's clear that even half-a-century after Independence, public sector banks have failed to help farmers? If you were the manager of a rural bank, what hope do you have anymore that you can get any of your money back, when the Finance Minister himself has, on TV, said that no one will go to jail for bank loan defaults? Also, how will Sinha ensure that the poor—deserving—farmer who's just lost a crop is still eligible for a credit card? Not only will Sinha not be of help to poorer farmers, he may just end up presiding over the total ruination of the rural credit system.

The promise to lift curbs on exports of most agro-products barring foodgrains will streamline their movement and marketing. But most of the so-called reforms are wasted by the rollback of urea price hike, which would have corrected a long-standing imbalance in plant nutrient use. This and the dilution of the power reforms put the ball squarely back with big farmers whom the BJP is clearly trying to woo, and neglects the long-term interests of the sector.

Should the small entrepreneur be happy? True to the BJP manifesto,the budget has grand plans to boost small enterprise, ostensibly to generate employment and promote the swadeshi entrepreneurial spirit. Rs 300 crore of excise concessions, doubling of working capital threshold (much like the standard deduction limit for individual tax-payers), cheaper and more credit, making SIDBI autonomous and powerful. The question of dereservation as per the Abid Hussain committee report is not addressed. As also the need to review the critical question of delayed payments to these units, which often forces their premature death. Sinha quaintly seems to believe that large amounts of credit can miraculously solve all problems.

That's the same philosophy guiding the 35 per cent hike in plan expenditure for infrastructure. In fact, former finance minister P. Chidambaram is voicing the average worry when he questions whether the higher plan outlays can be spent at all. Said he: "Sinha doesn't seem to have taken into account the absorptive capacity of these sectors. " Wide-ranging tax concessions, as announced for housing, would have proved more effective.

The people pay the price: In fact, such large doses of credit and the assumption of an implicit inflation rate of 7-8 per cent (WPI is already at 6.5), coming on top of the liquidity overhang, will fuel a substantial price rise. And these factors will be heavily aided by Sinha's extremely retrograde indirect tax measures this year—in a single budget, he's raised Rs 3,300 crore through customs and a whopping Rs 5,000 crore-odd through excise. Says a very perturbed Raja Chelliah, father of direct tax reforms: "The clock has been put back as far as tax reforms are concerned."

 Poor Sinha. In its wish to secure the salaried middle class vote, the BJP government couldn't really touch the direct taxes which had been simplified to the core by Chidambaram. Instead, it has launched three more schemes on this front—Saral, to simplify tax forms; Samman, to lure and reward the honest taxpayer; and an amnesty scheme for corporate indirect tax evaders, Samadhan, which revenue secretary N.K. Singh feels is an important reason why corporate tax collections will go up by 34 per cent this year. It's easy to see that, for obvious reasons of reining in the fiscal deficit, this government has gone the whole hog to earn revenues.

But thanks to steep hike in excise, several consumer non-durables will be costlier by about 5 to 10 per cent. An added curious feature of the excise hike is the targeting of branded and packaged goods, which ensure quality and are therefore price-inelastic. The finance minister's desire to discourage the so-called western concept of brand-building smacks seriously of the Swadeshi Jagaran Manch's pre-industrial-age philosophy.

However, the single-most retrograde step in the budget is the imposition of an 8 per cent countervailing duty (CVD) on imports, which effectively works out to 11-12 per cent on average (as it's compounded on the CIF value and existing basic, special and additional duties!). It will not only affect the better-off consumer, but also the poorer class by restricting competition and protecting inefficiency in several goods. In fact, most consumer durables, already attracting peak rates of duty, will now probably be even more costly. Is this the way to start an industrial revival? Says trade economist Bibek Debroy: "The scissors-and-paste job is back on the customs front." Says N.K. Singh, defending the move:"We've only tried to correct the anomaly in local taxes that domestic industry was forced to pay compared to the foreign companies. That's permissible under WTO." It would have been far simpler instead to move towards a central VAT regime and simplify excise rates rather than hiking both local taxes and import tariff.

The faithful businessman is also not spared: Ironically, by not making any allowance for manufactured goods which depend heavily on component import, Sinha has hit many of those whom he wanted to protect and reward. Said CII deputy director Manashi Roy: "After going through the implications of the proposals, we find that industry is not so well-off and will actually have to bear the brunt of many adverse measures." Even fully indigenous businesses will be hurt because the CVD doesn't apply to finished goods imported for trading. Why then should a foreign company set up a manufacturing base in India when he can just float a trading company and take the profits home? Said Subodh Bharghava of the Eicher group: "Some more thought was required before taking this strong step. " Agrees R. Sesha-sayee, MD, Ashok Leyland: "I wish the minister was more selective than raising customs duty across the board." Critics have already complained that this virtually amounts to inviting foreign companies through the backdoor, but without ensuring that they part with crucial technology and fulfil employment and export commitments. Shouldn't Indian manufacturers too ultimately follow the same route? If swadeshi means turning manufacturers into banias, then it's certainly not good economics. How did Sinha then hope to reward his faithful lobbyists? The logic is incomprehensible.

Insurance just a promise? The major bold initiative in the budget on opening up insurance to the private sector is but a single sentence of intent. Sinha himself has indicated the bill may not come before the winter session of Parliament. Before that, if the Left parties are to be believed, nationwide strikes will ensure the proposal is still-born. Says CPI(M) politburo member Prakash Karat: "A lot of struggle lies ahead if the government does not change its stand on insurance. The workers and trade unions will not take it lying down. We'll make this a major plank for opposing privatisation." And so will the mother organisation of the BJP, the RSS. Says K.R. Malkani, BJP MP and former editor of the RSS magazine Organiser: "We should split the LIC into two—private and government. And then let the people decide which part they want to remain with." The mind boggles.

Worse, Sinha's budget is a steep tight-rope walk: one false step and the economy may just get bankrupt. The problem with the BJP's growth theory is that it's a perfect cycle—one missing component and the growth fizzles out. It's a supply side budget, where the huge sums to be invested in housing, energy, roads, telecom, irrigation, the rural network will raise jobs as well as demand. On the other hand, most of this money is expected to come from borrowing and massive taxation, mostly indirect taxes like excise whose volume is dependent on sales, not production. Stagnating demand and lower imports may well unsettle the revenue projections and leave little for investments. As a result, deficits will widen.

And inflation is built into the system: the nominal GDP growth rate of 15 per cent is equivalent to 7 per cent real GDP growth and 8 per cent inflation. If expected growth does not take place, say it remains at 5 per cent, then we are automatically looking at double-digit inflation. Along with huge, unsustainable borrowing levels, that'll create pressure on the rupee, hike real interest rates, and dry up liquidity. A net market borrowing level of Rs 55,900 crore is already too high, and may just shoot up. Adding to the red signal on deficits. Both revenue and fiscal deficits, at 3 per cent and 5.7 per cent, respectively, are perched on a precipice. From there to a balance of payments problem is just one short step.

What about exports and FDI ? In both these worst-case scenarios,there would still be the cushions—forex earnings through FDI and exports, and public sector disinvestment. Sadly, in the first, there are no new measures. In fact, as Debroy points out, at the end of the year, the two per cent so badly needed for growth could have just come easily from exports. Especially since the second instalment of the trade reforms was so eagerly awaited after commerce minister R.K. Hegde's assurance that this would be taken care of in the budget. By ignoring the external sector altogether, the government has proved to be fatally inward-looking. This, despite a consensus among economists and policymakers that the best way out of stagnation would be to encourage export-oriented labour-intensive manufactured industry-led growth.

Adds Marshall Bouton, president of New York's prestigious Asia Society: "I don't see the FDI being doubled for anything done in this budget. Simply improving the procedural environment won't bring about that kind of a shift." Says K.N. Memani, chairman of Ernst & Young India: "Sinha has clearly ruled out FDI in the insurance sector, and even while announcing several sops for housing, he didn't mention any FDI initiative." Still, let's assume that cutting red tape may just grant the $5 billion or so expected by Sinha, considering the sheer volume of pending proposals. But what on earth will the monitoring officers (who are supposed to chaperone each project through every necessary clearance) do? Is this a proposal to create more jobs or doorposts?

Sinha, apparently, believes that NRIs will compensate for the entire lacuna in forex receipts. For them have been reserved the biggest incentives in the budget—green card, visa-free status, two new schemes. Surely, Sinha has not forgotten NRIs turning back on India in 1990-91 when the country needed their money the most, and when he was finance minister? The truth of the matter is: the NRI's patriotism rarely extends beyond his vocal chords.

Public sector off the pedestal: As for public sector disinvestment, that's one area where, true to his party's basic economic philosophy, Sinha fulfils even the most optimistic expectations by finally removing the fig leaf of patronage, even though it may take years for the government to reach that threshold. As is evident from the diatribe of CPI general secretary A.B. Bardhan: "If you decide to disinvest up to 26 per cent in non-strategic PSUs, which are 200 out of 241 PSUs, you are actually proposing a blanket privatisation." Which is damn good. But, as G.V. Ramakrishna, long-neglected chairman of Disinvestment Commission, adds: "That's a statement of policy that lacks specifics. There's still no clarification of the commission's role." He's also not happy with the new lucrative VRS for unviable PSUs. It's far better, Ramakrishna suggests, to set up a disinvestment fund to restructure PSUs and get more out of their share sale, than to use the disinvestment proceeds for filling up revenue gaps.

Logistics apart, there are two worries. Political consensus, for one. Says Debroy: "Even if the government goes ahead with the divestment of four companies already lined up—IOC, GAIL, VSNL, CONCOR—it might get more than Rs 5,200 crore. But given the current political instability, can it?" The post-budget dressing-down in Parliament doesn't augur too well on this front either.

The other worry is the capital market. Will sentiments revive? Says Assocham president L. Lakshman: "This budget doesn't give any indications about reviving the capital market, except for derivatives." With FIIs moving out and the PSU disinvestment process stuck at the same level for the past couple of years, the markets need something radical to stir up sentiments. And to move ahead with his promises on the public sector is the most important task Sinha faces right now to make his budget work.

To end on a more cheerful note, it's quite possible that the rains will be bountiful, investments in agriculture and infrastructure will start rolling, a boosted rural economy will create demand and absorb the inflationary impact.