Stuck At Medium Pace

Then again, he may not. For he’s the man who told off global business in Davos that "this is our pace of reforms, take it or leave  it". And, secondly, as a senior finance ministry official puts it, "so far, his record of meeting Budget promises is unparalleled. He made 29 promises in the speech and has fulfilled all but one. The rest are quantitative targets, they’re not foolproof."

To be fair to the finance minister, he took a number of measures to spruce up the capital market and buoy corporates. He did not go back on the minimum alternate tax ( MAT ), but commissioned the central stocks depository, scrapped his plan for non- voting shares, introduced some amendments to the Companies Act and set up a committee for a simplified, overhauled Act, converted the Industrial Reconstruction Bank of India into a financial institution, regulated non-banking finance companies, restructured the import list, expanded the automatic approval list for foreign direct investment and technology payments, and initiated changes in the Sick Industries Act and the role of the Bureau of Industrial and Financial Reconstruction. The next Budget will seek to implement a part of the Abid Hussain Committee’s farreaching recommendations on the small industries sector. But in the absence of well- directed, cohesive reforms, he failed to secure the confidence of businessmen. Nor did he get the capital markets to rise to his tune.

Says S. P. Gupta, director, ICRIER : "He promised a lot in his speech, but many of these were not followed through by the Budget itself. The most important of which is the assumption of a quantum of resource flow from abroad. The market was expected to mould to the banking sector and credit needs, public sector investment was supposed to take care of itself, and decentralisation, the new government’s most ambitious promise, didn’t happen."

In fact, adds Bibek Debroy, former consultant to the Finance Ministry, "the decisions taken in the last 45- 60 days— coal privatisation, easing import curbs, automatic FDI approvals— are far more important than his Budget promises, many of which are not in place yet." Boasts the Finance Ministry official: "In the past three months, we’ve done more than was done in the last three years by Manmohan Singh." The flurry of activity was the direct result of a closed- door meeting between Prime Minister Deve Gowda and Chidambaram, before they left for Davos, and Industry Minister Murasoli Maran, widely held as this government’s most successful reformer. The meeting recognised that industry, domestic and foreign, was getting impatient with the inactivity, and major policy decisions were needed to change the growing perception of a ‘sleeping administration’. Unfortunately, the meeting failed to find the golden mean between the political impact of hard decisions like raising administered prices and the economic impact of soft ones like spending more and more on special assistance schemes. As a result, even with a postponed petroproducts price hike, fiscal 1996 may end with a 9 per cent inflation, warns Gupta.

A Finance Ministry note itself admits that expenditure may go awry due to special allocations to development schemes, defence and space. The RBI report on currency and finance has found that as on January 24, the Budget deficit was Rs 13,755 crore compared to the estimated Rs 6,578 crore. The government had already completed 96 per cent of its borrowing programme by mid- January, leaving only Rs 1,482 crore to be raised to meet its annual target of Rs 35,294 crore. While the share of ad hoc treasury bills was only Rs 6,200 crore over April- December ’96, there is a fear that borrowings may rise to fill the gap generated by rising expenditure and a sure fall in revenue receipts.

With imports falling to a negative 2 per cent over April- November (capital goods imports actually fell by 7 per cent), customs collections have been slack, growing at 22 per cent instead of the targeted 26 per cent. While Partha Shome, director, NIPFP , expects the special 2 per cent customs levy introduced in the last Budget to take care of the customs shortfall, it may not be able to save the tax revenues target. For, excise too grew slower at 11 per cent compared to 14 per cent. Ministry sources maintain that corporate and income tax revenues are buoyant and will pick up further at the end of the year— by its own estimates, tax revenues over April- December  had met 68.7 per cent of the target. However, few outside the ministry expect Chidambaram’s ambitious revenue deficit target of 2.5 per cent to be met.

A large part of the confusion is generated by the failure of the PSU divestment programme. With the Disinvestment Commission languishing without statutory powers (which it is unlikely to get ever with the powerful industry ministry having its way) and the capital market without funds, the government hopes to raise about Rs 1,500 crore, same as last year, instead of the Rs 5,000 crore expected by Chidambaram. This would have really upset Chidambaram’s applecart, had it not been for the providential escape in the form of the Fifth Pay Commission burden of Rs 8,000 crore cleverly shifted to the next fiscal.

As a result, there’s a perception in the ministry that revenue deficit target can be easily met, while the fiscal deficit may touch 5.3 per cent of GDP . But, says Gupta, rise in revenue expenditure, especially pro-poor schemes, will probably result in a fiscal deficit of 5.5 per cent plus. Debroy’s estimate is a higher 5.7 per cent.

While the Finance Ministry maintains that thanks to zero- base budgeting and scrapping of non- starter projects, expenditure is largely contained at 60 per cent of the target over April- December, the finance minister’s fulfilled promises for the so- called poor may go far in disturbing the budgeted estimates at year- end. The retargeted PDS , for instance, under which so far only two states— Kerala and Tamil Nadu— have identified the beneficiaries for the half- priced cereals. Says Debroy: "Once the really poor states like Bihar and Andhra Pradesh complete the identification, the food subsidy bill, budgeted at Rs 5,200 crore, will shoot up."

The other pro- poor measures, under the Budget and out of it— creation of a National Illness Assistance Fund, higher allocation for basic minimum services, doubling NABARD ’s share capital, setting up state- level agricultural finance bodies, launching accelerated irrigation benefit programmes, commissioning a high-outlay Ninth Plan, special assistance for the North-east— will result in a spiralling expenditure plan. Yet, Chidambaram failed to set up the Expenditure Reforms and Management Commission, as promised, in the last eight months. Says the ministry official: "No politician wanted to be a part of the exercise, and the finance minister explicitly wanted a body of politicians. But an expenditure commission may still come up next fiscal."

YET to surface is also the much-touted white paper on all explicit and implicit subsidies, which the ministry says is ready to be unveiled in the Budget session. Meanwhile, the Cabinet post haste cleared the Tariff Commission last week with not a single member appointed. Its job of recommending appropriate tariff levels, looking at producer-consumer conflicts, and recommending the replacement of quantitative restrictions (QRs) with tariff rates in the next three years, despite India’s definite commitment to the WTO, is also confusing. Says Debroy: "At present, QRs exist on agroproducts, urea, petro-goods, manmade textiles and consumer goods. Of these, QRs may be removed only on the last and perhaps high countervailing duties slapped— the rest are too politically or economically sensitive issues."

But the two areas where Chidambaram has badly let down the reformists are infra-structure and insurance, the latter of course due to political reasons. Says Debroy: "The Left has a voice far out of pro-portion to the number of its seats. And in two areas— disinvestment and insurance— it’ll make sure that nothing is done." Only the new Budget has the answer to what Chidambaram can do about insurance, but in infrastructure, the fact that the new Infrastructure Development Finance Corporation (IDFC) still does not have its foreign fund sources in place, let alone an executive board, shows the extent of his miscalculation as well the failure of the piecemeal approach to infrastructure policy reform. Moreover, instead of going to infrastructure funding as expected by Chidambaram, the special 2 per cent customs levy will end up bolstering the weak revenue position. With about $3 billion FDI cleared in fiscal ’96, delaying reforms in this crucial sector can be suicidal.

To be fair to the finance minister, he had more than his share of political tightrope walking. But, admits a Finance Ministry source: "This government has the same number of reformers as the previous— Gowda, Chidambaram and Maran as opposed to Rao, Manmohan and Chidambaram. And socialist pressures inside the Rao government were the same as the present government is facing outside of it. The problem is, the Indian government works best under a crisis." Unwittingly, it will be the practical Chidambaram with his well-exhibited contempt for rules and procedures and who had the courage to implement MAT when Manmohan had been sitting on it for four years, who’ll get the flak for the reforms losing its course under the UF Government.

Says Debroy: "Chidambaram should really go all out in this Budget with reforms. He has nothing to lose and everything to gain." Adds Gupta: "The urgent need is to sell the reforms rightly and restore the confidence of business, both domestic and foreign. Too much accent is wrongly put on raising revenues and not enough on cutting unwanted expenses." Still, there could be some amount of presumptive taxation and MAT in some form with little change in peak rates of import duties. More important is expenditure, which remains inflexible despite hard intents. With the Pay Commission placing a huge burden of Rs 8,000 crore plus arrears on the government, the Finance Ministry may try to push disinvestment hard next year. And they are pinning their hopes on a rising market (sensex has already touched 3,500) and the intrinsic value of the PSUs. Says a ministry source: "In this lean period, the Bank of Baroda issue was oversubscribed, and 60 per cent of the subscription came from the general public, in the northern region from places like Jaipur and Sawai Madhopur. So PSUs will still get a good price."

Last-minute jugglery (raising rice or wheat prices, for instance) and the usual saviour, RBI, may yet salvage the balance sheet of fiscal 1996. Already, the money market is agog with expectations of further borrowings by the government, the safest in the short term and highest-paying client of the banks. And despite Chidambaram’s promise of putting a stop, finally, to issuing ad hoc treasury bills (or, printing money as a stop-gap) by March, the Budget may end up with higher monetisation than expected. Tomorrow, as they say, is another day.