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February 27, 1999
'The FM could have pushed through many more reforms'
The Budget was pretty much along expected lines, other than for removing some uncertainty for the capital market through the package in UTI and giving a positive signal for the mutual fund industry through tax incentives. The gold scheme is also going to be quite interesting to watch. Together, they might very well unleash some long-term value in household savings.
Anything that unlocks physical savings into well-administered financial savings is a good idea. For a household saver, if they get a decent yield plus tax breaks in addition to whatever value utility they would get from just holding the physical asset, it is good news.
But on the fiscal side, while the intentions are good, I can't see how the optimism of a 4.5% fiscal deficit can actually be met.
The regressive steps are clearly on the direct tax side with a 10% surcharge on both corporate and income tax. In all honesty, however, the finance ministry is doing a good job of extending the tax net. And our tax rates, in the international context, are quite reasonable.
Market people, including some fund managers I just talked to, are relieved that the Budget was not as harsh as it could have been, so markets are zooming on the relief factor. Plus there are the longer-term benefits from the tax incentives to the mutual funds and individual investors through capital gains tax. Also, some sectors like information technology, pharmaceuticals and FMCG [fast-moving consumer goods] are doing quite well and they are heavyweights in the Sensex.
I don't think the Budget could have been much different, except, perhaps, I would have pushed through many other reforms, in particular opening up the insurance sector to foreign investment, further streamlining financial-sector reforms, doing more on the telecom and infrastructure sectors, and just being bolder in pushing a liberalising agenda forward.
I just wish we could have growth as a result of this Budget, but my head does not think there will be any growth as a result particularly of this Budget.
I believe the market over a twelve-month view will be much higher than it is today, but that may very well be after it has fallen from where it is today. It all depends on the confidence you have in the stability of this government.
As a result, the primary market will remain under pressure in the short term, but one major difference in reviving its health may well be how the government handles its retail privatisation programme. I do believe that if the government actually offers its high-quality companies after building up marketing momentum, that could very well make a huge change in the health of the primary markets.
The Budget clearly recognises that the government has to make the whole transaction process easier. But the real burst in exports, I believe, will happen when the rupee goes down to 50 to a dollar, because in real terms our international competitors have seen currency devaluation that makes them much more competitive. But I don't see the rupee touching 50 in the near future, though I can certainly see 10% depreciation in the next 3-6 months.
I don't think the Budget really affects the NRIs. As such the only concession to them has been to change the resident Indians' CGT levels to that of their NRI brethren. And also while details haven't been given, the ability of NRI businesspeople to invest more freely in businesses in India. But if you want to repatriate money to India, you would be well advised to wait for the rupee to fall a bit.
I don't think we are heading for a BoP crisis. Not yet, at least. But if the dilly-dallying on hard political decisions continues, we may well see such a crisis. I hope we see more stability at the Centre, either through new elections or realignments, for only then will the real decisions be taken.
Overall, though this Budget has been a bit of a damp squib, I hope we will be able to achieve the finance minister's dream of India as an economic superpower by 2020. Otherwise, we're all dead anyway.
Alok Vajpeyi, managing director, Vector, is a venture capitalist.
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