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|February 27, 1999||
'The strong protectionist stand will restrict demand and lead to inefficiency'
The Budget is long on long term initiatives and short on short term measures to boost the economy. I would have liked the government to have boldly reduced excise duties to expand markets at this time rather than take a strong protectionist stand which, while protecting the profits of many sectors in India, will restrict demand and lead to inefficiency.
Also, the diesel hike will be inflationary and the fiscal deficit is regrettably too high. What the government could have done after talking about downsizing was provide for a VRS scheme for government employees. The concessions for venture capital will be ineffective and continue to show an embarrassing lack of understanding of industry.
I am all for a reduction in long term capital gains to make it on par with that for NRIs, especially in the context of an effective increase in direct taxes on high income individuals and corporates. The long term measures put a heavy burden on Gram Panchayats on the implementation of the rural and human development initiatives. Both these are excellent: This government for the first time for any Budget tried to influence states to behave responsibly, as for instance in reducing subsidies on irrigation.
The second generation reforms could have been outlined in terms of a reduction in subsidies on input prices for farm material as well as labour and administrative reforms. Clearly, the current political climate has not allowed the finance minister to progress in that direction. The improvement in the foreclosure laws, enhancement of the FDI automatic approval list, abolition of stamp duty on debt instruments, increase in bank tribunals are welcome steps.
Refocussing the MRTP Commission to promote competition and the Expenditure Reforms Commission are two commendable structural initiatives.
If the government could demonstrate effectiveness in implementing long term measures as they had suggested in the rural and human development areas, there is certainly some benefit to be seen in the next few years, but there is very little for the immediate term.
There is very little in the Budget to stimulate the economy in the immediate term. The protectionist measures to help in improving profitability will unfortunately not lead to growth in size of markets.
Government initiatives on housing are comprehensive covering both the rural and urban areas. Of particular interest is the proposal to improve foreclosure laws which will be implemented immediately. These certainly wil help in boosting housing stock.
I think some capital goods sectors will benefit from the protection provided by this Budget. Also, the rationalisation of customs duty rates to take them to the upper end of the rate structure will bring improvement in profitability for many sectors which have been facing competition from overseas, but this measure is not desirable in the long term. Wed need to go back to steady reduction in customs duties.
I think the FM, concerned as he was with the fiscal balance, missed out on effectively reducing excise duties across the board which could have stimulated demand. Also, he could have taken the opportunity to outline the second generation of reforms which would necessarily involve progressive reduction in farm input subsidies, labour reforms and administrative improvements in the government.
I speak for myself -- given the inflation deferentials between India and the developed countries the Rupee will drift downwards against the major currencies.
I think equities still remain attractive in India and within that there will be attractively priced companies which one should select on the basis of thorough research.
The FM made references to improving productivity. Reducing custom duties is a proven way to improve productivity and rather than devalue, we should seek to become more productive and competitive. If the FM were to get productivity improvements -- the refocussing of the MRTP is a a good move -- we do not need to devalue.
The measures in the Budget will help certain sectors with continuing growth and with a good monsoon we should see a revival in aggregating demands and that will help improve the primary markets.
Subsidy is no answer, interest rates can be brought down by reducing the fiscal deficit by cutting down multiple intermediation in the financial sector by, for instance, allowing HDFC to become a specialised bank. Also, improvements are needed in the delivery side of housing to bring down costs. Scrapping the Urban Land Ceiling Act should be followed by improving municipal planning and approval process.
The long term initiatives are good. Especially, the rural and HRD ones are attractive, but I would have hoped for a little more immediate stimulus for the economy.
Pradip Shah is chairman, IndAsia Fund Advisers
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