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February 27, 1999
'This Budget is the first indication that reforms can be reversed by a thoughtless government'
I don't think the Budget will reverse the recession. Recession will be reversed only if the industry sector's growth picks up. Today, it is at a low of 3.7 per cent. I do not find anything in the Budget to enthuse the investor, Indian or foreign. On the contrary, there are many disincentives for the investor.
This Budget is quite disappointing. No lessons have been learnt from the last Budget and the performance in the current year.
This Budget is the first indication that reforms -- hitherto considered irreversible -- can be reversed by a thoughtless government. There are many examples of such reversals, but the worst cases are the increase in customs duties, the increase in excise on capital goods, the across-the-board surcharge on customs duties and the across-the-board surcharge on income tax and corporate tax.
The 4.4 per cent fiscal deficit thing is a deceptive figure. Rs 250 billion has not been included on the grounds that 'a new system' is being introduced. This Rs 250 billion amounts to about 1.6 per cent of the GDP. Hence, the true estimate of fiscal deficit is 5.6 per cent on the basis of the new GDP series (4.0 + 1.6) and 6.0 per cent on the basis of the old GDP series (4.4 + 1.6).
This is the Budget estimate. At the end of 1999-2000, the figure may be worse. For example, the FM started 1998-99 with a Budget estimating a fiscal deficit of 5.6 per cent but has now confessed that the year will end with a fiscal deficit of 6.5 per cent.
There is not much to feel good about. If you are an investor, will you feel good if you are told that customs duties have gone up substantially, that your capital goods will have to bear higher customs duties or higher excise duties, and that you would have to pay a surcharge of 10 per cent on both corporate tax and personal income tax? There will be few investors in the world or in India who will feel good after this Budget.
The economic survey presented three days ago has admitted that 1996-97 [when Chidambaram was the finance minister] witnessed a GDP growth of 7.8 per cent. This was why we took some daring initiatives and presented the Budget for 1997-98, which was called 'the dream Budget'.
The economic survey admits that at the end of 1997-98, inflation was the lowest in many years at 4.8 per cent; forex reserves were the highest at US $ 26 billion; that both the debt service ratio and the debt to GDP ratio had come down to their lowest level.
The only disappointing feature at the end of 1997-98 was that GDP growth was only five per cent. This was because of the Asian crisis, when nearly every economy in the world was either contracting or registering a low growth of 2 to 3 per cent. The other reason was that the UF government was first destablised exactly 30 days after the dream budget. It was destabilised once again seven months later. Despite international and domestic uncertainty, we recorded a modest GDP growth of five per cent in 1997-98 with a high degree of price stability.
I think the borrowing of the central government should be capped under legislation made by Parliament under Article 292 of the Constitution. If you are asking about any practical step not involving constitutional action, I will pick interest rates. The FM should have announced steps to bring down interest rates. This solitary step would have enthused investors and producers.
Many of the old initiatives like AIBP, RIDF etc have been continued in agriculture. One has to wait and see how far the new schemes to enhance credit to agriculture will work. Primary education is entirely a state subject and all that the FM has done is to wisely copy the Madhya Pradesh scheme of education guarantee and promised funds to the state governments which adopts such a scheme.
There is no special responsibility for the central government, except to provide funds to states that adopt the scheme. There are other isolated good ideas.
I would have announced the government's intention to cap borrowing under Article 292. I would have also signalled lower interest rates to attract the investor. I would have paid special attention to FDI that, in 1998-99, was 38 per cent lower than in 1997-98.
P Chidambaram, MP is a former Union finance minister.
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