Little Tricks Won't Do

TO everything there is a season, and a time to every purpose under the heaven. A time to be born and a time to die... a time to hold your breath and say a prayer for this country with great potential, tremendous enterprise and politicians of myriad hues with nothing but waste on their brain. For, this is the time to have the annual budget, a time to demolish old hopes and build new stories.

To those who call the budget an exercise in matching unreal expectations with real resources, spare no kindness. They are the ones who cannot perform, have no imagination or vision, and tend to lay all blame on coalition politics. If the economy's most sacred annual ritual does not hold popular interest anymore, it's because of a crisis of confidence in a government that has rarely matched its deeds with promises, preached austerity even while loosening its own belt. Says ficci secretary general Amit Mitra: 'It's simply shocking that 94 paise out of every rupee borrowed goes into debt servicing.'

Nowhere is the crisis more evident than in the stockmarket where there is no pre-budget rally. Not even after the promise of a capital market package. Not even after Hindustan Lever's results. The market believes that when the rally starts, if it does, it will do so despite the quality of the bill of fare.

Stockmarkets, after all, reflect trends in industry which are as bleak. Assocham feels that 1998-99 could be the worst year of the recession. Its president K.P. Singh says that in the first six months, basic goods was the worst performing sector, followed by consumer durables. Only the capital goods sector showed a recovery compared to the previous year, a trend which is matched by the Index of Industrial Production.

And therein lies hope for the economy: that the recession may be bottoming out, that demand for capital goods is rising, that if people are buying less salt, toothpaste or cigarette, surely nothing can be worse? Agricultural production is slated for a record improvement over last year's. All this has happened despite the 1998-99 budget and will ultimately save it from collapsing along with the economy. Says Ashok Gulati, an economist with the Institute of Economic Growth: 'The situation is exactly the same as in 1991, except that we have a decent level of foreign exchange reserves.'

As a matter of fact, in a spate of recent measures, the government has done all it can to prevent a replay of 1991. It has raised prices of ration-shop foodgrains, sugar, urea and lpg, and saved a useless subsidy of around Rs 4,000 crore. It has devised swap deals for psu shares to net hopefully around Rs 8,000 crore, according to finance secretary Vijay Kelkar. And it hopes the Samadhan scheme will net Rs 2,500 crore. Plus, there's the global market bounty of an oil pool account surplus of anything between Rs 11,000 crore and Rs 18,000 crore. That will take care of the numbers gap in the fiscal deficit, perhaps to some extent even the revenue deficit. And the new national accounts base and composition, by pushing the gross domestic product (gdp) to a high, will do the rest. Says Delhi School of Economics professor Suresh Tendulkar: 'The Central Statistical Organisation and the oil pool surplus have given (finance minister Yashwant) Sinha a respectable way out.'

But, says independent economist Surjit Bhalla, 'bringing down fiscal deficit is like bringing down the temperature, one must target the real causes of the illness'. Indeed, no amount of window-dressing can save the primary deficit which is slated to double this year, putting the shameful record of 1991 in the shade. The primary deficit is fiscal deficit minus interest payments, or that part of the new debt that could have been controlled. Till January, the government has borrowed 2.5 times more than what it had borrowed in the first 10 months of 1997-98. Plan expenditure is stagnant, you have not invested much in roads or irrigation or putting up new plants, why then did you have to borrow so much?

As a result, the amount of money floating in the economy is rising by 20 per cent, banks are happy to lend to government crowding out private investment, and the mighty state is steadily eating its way to oblivion. And the strong measures taken in the recent months, including the small-but brave-cut in government small savings rates, may come to nought until and unless Budget 1999-2000 follows it up with some stronger and braver steps. Not just money-making measures like the proposed cess on diesel or a uniform 5 per cent import duty or sporadic market-boosting exercises like reduction of excise duty on cars.

Make borrowing easy: Primary among the odd jobs list for the finance minister is a cut in interest rates, the only thing not determined by the market yet. A reduction of a minimum of 300 basis points, says Bhalla, if not 500 basis points, according to capital market expert Sudhir Mulji. The real interest rates are too high, points out Bhalla, which prohibits borrowing by business and industry.

Simplify indirect taxes: If Sinha remembers his broad hints in the last budget, the long-pending excise structure reform may still come about. Along with a reduction in rates, as demanded by ficci's Mitra who strongly believes that the initial excise loss will be more than made up by higher collection. A cut in customs rates which flies in the face of the swadeshi lobby will of course be too good to be true. Says Bhalla: 'No country in the world has managed to raise tax rates and revenues together.'

Slash subsidies: Mitra estimates a total non-merit goods (higher education, lpg, irrigation power charges and the like) subsidy of Rs 35,810 crore, of which the government can easily axe at least a fourth in the new budget. The reduction in the subsidy bill by increasing the prices of foodgrains supplied through the public distribution system is a good beginning. Also, the government must carefully estimate the subsidies going to the privileged class, who are unfortunately the most vocal, and devise a delicate way of stripping them of that privilege without raising too many hackles. This would release money for hospitals for the poor, and roads and drinking water too. 'Buy foodgrains from the open market,' suggests Gulati.

Reform agriculture: There is still no single market for agriculture products within the country. Remove all distortions in the incentive structure for farm sector players, says Gulati-do away with the barriers to free domestic trade like state levies, licensing norms, reservations, stocking limits, develop organised markets and stocking facilities, introduce commodity futures. Alongside, open up trade in farm goods and processed goods.

Invest in infrastructure and welfare: The state must get out of where the private sector can do the job and be where it is needed by its people. Says Tendulkar: 'The government must realise that it is the crux of the problem. It just cannot handle any commercial activity. ' The world over, economies have realised that the state has little role to play except in maintaining law and order and overseeing welfare and infrastructure development. Especially in India, the government has still to create the environment-both physical and administrative-for the domestic and foreign private sector to come and invest.In roads, agriculture markets, water development, massive investments are needed to tap the existing potential. To take a simple example, in irrigation, there is an untapped potential of 25 million hectares in major and medium irrigation alone, which needs an investment of Rs 250,000 crore. It gets less than one fifth now. Imagine what even doubling the level can do to our agriculture production, already one of the best in the world.

Quit public sector enterprises: Perhaps even the government is aware that equity swaps and floating gdrs are measures that are seen by the world as what they are: desperate moves. They are serving little purpose except to undermine the value of the selected psu. The government, say economists, should forthwith quit all losing psus and disinvest from profit-making ones before they lose their edge. 'If it had to raise money, why didn't the government sell shares in Maruti Udyog before it started getting frayed by competition?' asks Tendulkar.

Sadly, the government always takes the hard road only when it's pushed to the wall. Since 1994-95, even that wall seems to have been stretched miraculously, thanks to the economy's inherent resilience. In the countryside, however, miracles don't happen anymore.