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February 2, 1999
Business Commentary/ R C Murthy
Budgets must be forward-looking. Are they?
Soaring onion and tomato prices brought the Bharatiya Janata Party's governments down in Rajasthan and New Delhi. Also, they contributed to the Congress retaining power in Madhya Pradesh.
Sonia Gandhi's Congress is hoping the BJP will make similar faux pas at the Centre and dig its own grave.
The acid test for the Atal Bihari Vajpayee government is its second Budget, which is about four weeks away. Pre-Budget blues gripped the establishment well before business and industry started worrying over the shape of things to come.
The prime minister himself has taken control of economic affairs by presiding over committees set up to expedite decisions among others on Budget-related issues and restore credibility.
Credibility? Few believe in what Finance Minister Yashwant Sinha says. Once bitten twice shy. For instance, Sinha had predicted earlier a turnround in Indian economy by October last. That turned out to be a mirage.
With the Indian economy inexorably going downhill, there is all-round gloom. Foreign investment is stagnant. In fact, there is absolutely no coordination among various ministries. Foreign capital inflows would have fallen below $ 3 billion this year but for the inflows on account of on-going projects in automobile and electronics sectors, thanks to reforms put in place by the Narasimha Rao administration.
Vajpayee should stop blaming his predecessors, Deve Gowda and Inder Gujral for the current ills of the economy. True, the budgetary situation now is virtually out of control because of reckless commitments Deve Gowda and Gujral made Like the acceptance of Pay Commission recommendations and offering on the platter bonanzas to the Akalis in Punjab. But that is only a part of the story.
What has the BJP government been doing all these 11 months? Even its ally, the Telugu Desam Party, is accusing New Delhi of inordinate delays in clearing state projects. Continued inaction or less action, and blaming the earlier regimes will expose the incompetence of the BJP government.
New Delhi is now on a fire-fighting exercise. Its immediate objective is to bring down somehow the Centre's fiscal deficit for the current year ending March 1999 well below the media-predicted 7 per cent of gross domestic product against the budgeted 5.6 per cent.
Variation of just a decimal point means expenditure overshooting by Rs 16 billion! Well, the fiscal deficit is an important indicator. But the government cannot lead the public at large, especially overseas investors, up the garden path. In fact, they will figure out at once how the whitewashed fiscal deficit was arrived at.
Now Rs 75 billion are to be siphoned off the public sector enterprises through disinvestment to cut the fiscal deficit, for which the runaway revenue expenditure is responsible.
Everyone is interested in the Centre's financial rectitude, everyone wants to see how forward looking the Budget is. Of course, the Budget by its very nomenclature is to be forward looking. In the sense that it deals with spending (in this case) over the following 12 months. In practice, the policy decisions announced in the Budget are being acted upon at the fag end of the year.
Meanwhile, the government has indulged in fiscal extravagance that wreaked havoc on the economy. Prices of essential commodities soared. The BJP paid a heavy price. Vajpayee has learnt a bitter lesson, and triggered a spate of ordinances to establish that his is a government that works.
But credibility is restored best by initiating action on the policy decisions in such a way that it will impact on the economy straightaway, not 11 months later. Then the Budget can be termed really forward looking.
To coincide with the Rs 75 billion disinvestment in PSEs currently underway, the finance ministry should explore the possibility of liquidating the most expensive government securities held by banks. For banks can in turn use the funds to buy equity in the second round of PSE disinvestment to be set in motion early next fiscal.
Two birds in one shot. The government would achieve an overall reduction in public debt and get cash to cut the fiscal deficit. If the market is good, a larger amount than budgeted can be mobilised.
Also, there will be greater room for manoeuvrability if the process starts early in the year.
Action now will facilitate an even flow of cash to government coffers and avoid recourse to borrowings from the Reserve Bank. The experience so far has been that the government borrows right and left till the year-end, when a series of adjustments are made to show lower fiscal deficit.
There will be excess liquidity, too much cash, in the economy midway, putting pressure on prices. There are many other advantages. Topping them all is a message to overseas investors that it is not an administration that acts by fits and starts on Budget-eve.
Extend basic courtesies, then investors flock so long as there is money to be made. How did auto majors from the US, Germany, Japan and Korea come rushing when India opened this sector four years ago?
The basic objective of 1999-2000 Budget should be to spur investment and achieve a turnaround in the economy. Granted room for manoeuvrability is narrow. One cannot expect export-led growth at a time when most Asian economies are in trouble and industrial nations are struggling to maintain growth. We are yet to build the infrastructure for exports comparable to China, leave along Japan.
For instance, a tie-pin bearing Indian and US flags distributed at the Indo-American Joint Business Council meeting in Washington DC last September was made in China! Obviously, the idea was conceived in the US, someone on behalf of a Chinese firm was on the spot to pick up the order, got it executed in China and saw the consignment shipped in time for the meeting. The order was small but the marketing structure was fool-proof and reliable. Indian firms should emulate China.
The monetary policy of the Reserve Bank of India was lax during the year. The bank rate, which is supposed to set interest rates in the economy, was not adjusted appropriately and as frequently as was necessary. The administration in New Delhi was indifferent to management of shortages.
The forthcoming Budget should incorporate a series of measures to correct the situation and set the economy on a higher growth path.
Policies should be geared to hold the priceline throughout the year, including lean months. There must be a shift away from zero customs duties; at the same time, a notice that the deviation is temporary, would be in order. Then, a movement toward globalisation will be resumed in a couple of years.
Industry should be made to use the interval to tone up its health through restructuring. The RBI should cut the bank rate by l.5 percentage points to achieve a favourable psychological impact and the rate cut should be reviewed in July when the slack season starts.
A lift in public sector outlays will boost demand for core industry products like steel and cement. The government must offer incentives to states to redesign their institutions to qualify for World Bank aid.
If the economy is to be on the right path, decision-making must be fast and a competitive environment for exports necessary. There is no reason why the country should not attract sizable foreign investment. Those setting up bases for catering to the domestic market, would like to avail of export opportunities as well.
The Rediff Business Columnists on Budget 1998-99
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