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February 26, 1999


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Hard day ahead for Sinha

Muhammed Ash'ar Khan in New Delhi

Finance Minister Yashwant Sinha announces his second Budget tomorrow. Hopefully it will strike away from the one he presented on June 1, 1998.

Recently, Sinha has been talking of presenting a tough and hard Budget, a step he should have taken last year itself. But he came out then with a protectionist Budget that was not even truly swadeshi.

Will he charge up the infrastructure sector with investments, electrify industrial growth, unleash a flow of foreign capital, cut unnecessary expenditure and fuse the Budget with radical approach to reforms? Will he do something concrete to reassure foreign and domestic investors in the capital markets? Sinha's hands are tied, with the economy showing no signs of recovery and the Opposition parties all set to make his life miserable in the Budget session.

He has indicated, though, that its going to be a tough Budget. Professor B B Bhattacharya of the Institute of Economic Growth says, "In Budget terminology, a tough Budget has two implications: Either a dramatic cut in expenditure or a rise in tax revenue. Both are unpopular, that is why the word is tough".

The economy is in crisis. The third quarter results of corporate India have shown no signs of recovery. Reliance's net profits have fallen by about eight per cent, and TISCO's by a sharp 62 per cent.

As per the Economic Survey 1998-99, industrial growth has plunged from 12.8 per cent in 1995-96 to 3.5 per cent in the current fiscal year. Exports in dollar terms are very low at minus -2.9 per cent in this fiscal year, compared to a growth rate of 20.7 per cent in 1995-96.

The situation is worse on the revenue collection side. A shortfall of nearly Rs 234.8 billion is a large amount for a country struggling to get back on growth track. There has been little restraint, even on the expenditure front.

Both planned and unplanned expenditure are nowhere near the targets set for them. The Economic Survey figures show there has been an increase in the non-plan expenditure while planned expenditure has been less than expected. The government's expenditure has gone up, making it further difficult for the finance minister to curb the fiscal deficit. For Sinha, saddened as he that expenses are on the higher side, will now have to try and see that despite high spending the deficit is kept low.

In this context, the Economic Survey has a clear message -- that there will be a substantial jump in government spending this year. There has been an annual growth rate of 5.8 per cent -- hardly any better than last year's figure, and a fiscal deficit of 5.1 per cent for the current financial year. The finance ministry claims growth would have been better had had it not been for the global recession and the South East Asian economic crisis. But not everyone is ready to buy that.

Former finance minister P Chidambaram said of that charge, "We are blaming the East-Asian crisis which was at its height in 1997- 98, not in 1998-99. The overall fiscal and macro economic situations are very poor. I attribute it to the complete lack of governance..."

The Economic Survey has called for a comprehensive second phase of reforms to control the fiscal deficit and the external sector crisis. The Budget deficit would have to be financed somehow, and the government would have to borrow more from the market. The more the government borrows from the market, the industry will have less credit and have to suffer higher interest rates.

But the finance minister has promised to help the industry grow and give it more time to prepare for foreign competition. Yashwant Sinha says he will correct the anomalies in the present tariff structure and replace the current 15-slab excise duty structure with a three-tier system.

The zero-duty regime may be reviewed and a minimum floor duty may be imposed on all imports. In the last Budget he had slapped a special additional duty of eight per cent, which was later rolled back to four per cent on all imports. The five per cent special customs duty introduced by the UF government was also retained.

The finance ministry's non-tax revenue collections have also been below target. Consequently, the government is under greater pressure to collect non-tax revenue in the last quarter of 1998-99. In a country with a population of 950 million there are just 12 million taxpayers. The shortfall in this year's tax collection could force the finance minister to cut revenue targets for the next year.

Charan Wadhwa of the Centre for Policy Research says, "Tax revenues are in real, real trouble this year. The target was 20 per cent and the shortfall is already Rs 100 billion or more. This has thrown the entire book out of balance."

The Budget will try yet again to reduce the yawning receipt-expenditure gap. For this, the government will have to take the disinvestment exercise very seriously. The North Block is likely to raise the disinvestment target to Rs 100 billion for the next fiscal from the earlier estimate of Rs 50 billion.

The disinvestment programme for the current fiscal has been as bad a failure as in those in earlier years. The current financial year's target from the disinvestment exercise was Rs 50 billion. But the first sale organised by the block -- that of the shares of the Container Corporation of India -- could muster only Rs 2.25 billion.

The finance ministry then appealed to some financial institutions to create a consortium of fund to buy the four PSUs's shares. But the foreign institutions refused to step in. So to meet its own target, the government arranged for some share-swapping, a move severely criticised by economists. Nevertheless, that might give the government nearly Rs 70 billion. However, the PSUs are resentful that MTNL backtracked on its commitment to provide Rs 5 billion to the government exchequer through a share buyback option, citing financial compulsions.

No wonder the finance minister has few soft options left. This could mean subsidies are on the chopping block in the upcoming Budget.

Ashok Gulati of the Institute of Economic Growth says, "The time has come to rationalise the regime of subsidies and generate resources for investment. The growth process will depend on this." And though the finance minister is finding ways to raise resources, his options are getting fewer.

Sinha will have to resort to privatisation at breakneck speed. That will include opening up the insurance sector. Special Secretary in the finance ministry B K Chaturvedi said the bill to set up the Insurance Regulatory Authority may be introduced in the Budget session. But Sinha will not foget that global insurance majors have said they will have to reconsider their plans to invest in India if their stakes are pegged at below 26 per cent.

Yashwant Sinha desperately needs funds. Apart from trimming expenses, he will have to touch on some sensitive issues, like cutting down subsidies on food, fertiliser, power and petroleum. These eat up 14 per cent of the GDP. On the other, he could begin taxing the agrarian sector and speed up PSU disinvestment.

But this is not going to be all that easy. Can the finance minister of a shaky coalition do all this?

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