Watered Down

The present incarnation of the Finance Bill is but a skeleton of the proposals initially mooted by finance minister Yashwant Sinha and his brigade on June 1 (see chart). Almost half the initial proposals have been withdrawn. The infamous non-modvatable additional duty of 8 per cent on all major imports was cut to 4 per cent, the urea price hike was completely rolled back. More, the 8 per cent excise imposed on branded food products and spices, milk products and packaged tea, which had all the pressures of stoking the fire in the consumer prices, was withdrawn humbly despite Sinha’s repeated assurances of the Budget not being inflationary. And the government made serious amends by announcing a major package for infotech and textile sectors and yielding to major demands from the stockmarket and corporates.

In fact, the government’s apparent helplessness in Parliament not only reflected vulnerability to various pressure groups but also sent ominous signals that political considerations may well take precedence over pressing economic compulsions.

Says economist Bibek Debroy, now director, Rajiv Gandhi Institute of Contemporary Studies: "The Budget, specifically the Finance Bill, shows the inaptitude and ham-handedness of the government in handling economic affairs. It’s not as if there’s a dearth of professional economic expertise in the finance ministry. It’s all in the attitude."

 Ironically, even as the government suffered the debate on its hastily-construed Budget, the economy has been steadily moving closer to a mess. Business confidence among corporates is at its lowest ebb in four years, a quarter of small firms surveyed by the National Council of Applied Economic Research are expected to down their shutters soon. Inflation is already close to eight per cent. The Kandla cyclone has pushed exports growth down to a negative 18 percent.Assuming imports have remained at last year’s under 10 per cent so far, the trade deficit will have billowed further from $7 billion. A crisis seems steadily in the making, and all the Budget seems to have done so far is to add to the general gloom. It has not offered a solution nor many corrective measures.

Unlike the Budgets of Manmohan Singh and P. Chidambaram, which emphasised revenue generation through direct taxes, Yashwant Sinha’s Budget was essentially pegged on indirect taxes, which are regressive in nature. Secondly, Sinha’s dream of raising Rs 8,300 crore through customs and excise might just prove counter-productive and help fuel inflation. Thirdly, while earlier there was an attempt to harmonise the indirect taxes, the latest effort shows signs of a colossal mismanagement on that front.

Since the Budget, the government has shown an inclination to yield easily and pass on the blame to the junior ministry. Take for example the fiasco over the hike in petroleum prices. Says a senior BJP advisor, who doesn’t want to be named: "This is nothing but a lack of coordination within the government. It is a massive mistake for which the common man has paid. "

 Similarly, the reduction of the one-rupee hike in urea prices by 50 per cent and its subsequent withdrawal, shows the lack of political strength. Says the BJP leader: "The government’s intention was to nominally increase the price in order to discourage usage of urea which is not only bad for the soil but can also be a health hazard. But politically we don’t have the strength to deliver. With the Akalis one of our main supporters, the government can’t afford to annoy them considering that the Akali Dal votebank is a heavy user of urea." But didn’t the government anticipate such resistance since a similar proposal under Dr Manmohan Singh had faced major parliamentary wrath and subsequent death?

Within a few days of the Budget announcement, the government had given an impression that its proposals, however crucial they were for the economy’s future, were open to review. "This is a complete deviation from the norm of Budget handling. Usually minor concessions are given or taken away, but not in a major way like this. It shows the weaknesses of the finance minister and the government and that they are amenable to pressure and coercion," says consultant economist S.L. Rao.

RAO feels the rollbacks are going to cost the economy dearly. The confusion over petroleum prices will amount to a loss of Rs 300 crore on the initial calculations. The withdrawal of 8 per cent duty on branded and packaged products will account for a loss of Rs 263 crore and the reduction in Special Import Duty from 8 to 4 per cent will net in a loss of Rs 1,200 crore. Apart from this, losses on account of indirect tax rollbacks would amount to Rs 1,834 crore. Including the failure to save a subsidy of Rs 2,000 crore on urea, the total giveaway comes Rs 3,834 crore.

This effectively means that the government will face a deficit burden of close to Rs 7,000 crore as it started off with a deficit of Rs 3,000 crore. Against a revenue generation of Rs 162,000 crore, the total expenditure was estimated at Rs 165,000 crore (subsidies Rs 20,000 crore, salaries Rs 29,000 crore, interest Rs 75,000 crore and defence Rs 41,000 crore).

There is nothing striking in the Finance Bill now, feel experts. In the post nuclear test scenario, the issue was of growth. As such, apart from numbers, one would have looked for an overall vision for growth in the Budget. This is completely missing. Says Debroy: "Except for hoping, the Budget does nothing about growth. It is inherently inflationary and will not result in a real growth of more than 5 to 6 per cent."

He feels that during Dr Manmohan Singh’s regime, the economic ministries—finance, commerce, industry and the Prime Minister’s Office—were actively pushing the reforms. However, in the present government, there is no real initiative from anywhere. "The PMO and finance ministry are rudderless, the commerce ministry was still hopelessly pursuing a 20 per cent growth target and the industry ministry has had very little activity," he adds.

Experts feel that in a situation where none of the economic targets was likely to be achieved, the government should go in for emergency measures to take stock of the situation. "The government has a choice of borrowing or monetisation to save the economy. And among the two, monetisation is a better bet," says Debroy. But most of them know that in either case, India would be close to a situation similar to the one prevailing in the late 1980s.

The government, however, is still confident and feels that despite the rollbacks,revenue will not suffer as there is sufficient cushion available within the proposals. "There is nothing concealed in the Budget and all the estimates have been made very cautiously to keep room for flexibility. The built-in cushions will absorb the revenue losses on account of the rollbacks," says Mohan Guruswamy, a member of the BJP’s economic thinktank.

He feels that the government has tackled the issue in a prudent manner and worked for reducing deficits and maintaining a healthy book at the end of the year. "Yashwant Sinha is not a grandstander who produces a dream Budget which turns out to be a nightmare and still claims credit for that dream. One has to give him credit as there has not been any exodus of NRI or FII funds and the rupee has not fallen uncontrollably as a result of the proposals," says Guruswamy. The crisis, he thinks, is really of confidence on the government’s ability to take care of things at this juncture.

In the final analysis, while a lot of unproductive measures have been withdrawn, some of the more important issues, like high expenditure and borrowing, remains untouched and will continue to plague progress. Some of the positive sides of the Budget—insurance reforms, power sector reforms, land ceiling reforms and disinvestment—however, are still to see the light of the day. As for insurance, there’s a lack of consensus on the quantum of foreign equity component in the new private insuring companies. The disinvestment process is expected to be kicked off in September, while the entire Commission has threatened to resign. Foreign direct investment flow has peaked after a long time, thanks to an indirect impact of the sanctions which led the government to speedily clear pending proposals. The Resurgent India Bonds, just about the only measure, is just another channel of high-cost borrowing. Parliament has still not concluded a single legal business, except for the Finance Bill. Hopefully, it won’t be the last.