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February 27, 1999
'The emphasis is on fiscal prudence'
P N Vijay
This is an honest Budget without any gimmicks. The emphasis is on fiscal prudence and correcting specific distortions.
Interest costs have gone up because of historical reasons. This Budget attempts to reduce the revenue deficit which is the best way to reduce the government's interest expenses.
A lot of emphasis is being placed on corporate governance in India these days. I believe that the Indian financial institutions are the correct people to enforce this since nobody wants the government to interfere with the working of individual companies.
Putting a statutory cap on government spending is not an easy thing to do. However, both the Economic Survey and the Budget have quietly placed a curb on government expenditure as one of its most important priorities.
It is nice to see that the stock market has gone up five per cent after the Budget. This is in sharp contrast to previous years. Over the last seven years, the market has fallen after the Budget six times! So Mr Sinha's strategy of warning people of hard times has gone well with investors.
There is a huge increase in allocations for rural development. You may recall that our GDP growth of 5.8 per cent has been because of the strong showing of agriculture. I believe that buoyant rural demand is the key to a change in the industrial recession.
We are today sitting on the highest reserves of foreign exchange ($ 30 billion) in living memory. Also, our refining capacity is going up,which means we will have to import only crude.
I am afraid I don't much information on trading terminals abroad. There is a clear desire to see that the NRIs are able to consistently operate on our stock markets like the local people.
Customs Duties have been only rationalised. The very fact that FICCI is not too happy shows that there has been no effort to placate any lobby. The only lobby we believe in is the 100 crore (one billion) lobby of the people of India.
The Budget could have tried to push exports more since exports have actually declined. I believe the Exim Policy will address this important issue.
The Budget's impact on software companies would be pretty good. Investors were very apprehensive about the service tax and that has not happened. Specifically, Y2K expenditure is being treated as revenue expenditure. And this should give an impetus to more orders for software companies. Employee stock option plans or ESOPs have also been liberalised in terms of taxation and this should make our software personnel quite happy.
You will notice the very large committment to social development. The fiscal deficit reduction will obviously lead to a deduction in interest costs over a period of time. Defence expenditure is still one of the lowest in the world as a percentage of GDP. However, the initiatives being taken by Mr Vajpayee in improving relationships with our neighbours should lead to a reduced defence expenditures in the years to come.
The whole thrust of this Budget in my view is to build on the phenomenal success achieved in the area of agriculture and rural prosperity. Water management, rural credit delivery, empowerment of Gram Panchayats are some of the specific steps being taken to break the back of poverty.
In the next few months, stick to FMCG and pharma favourites. Once you see clear signs of an industrial turnaround, get into cyclicals.
Internal debt: The high level of debt is in my view the biggest challenge facing this government. The Economic Survey made repeated references to it and the Budget has also tried to put a time-bound programme to reduce it. We need a political consensus on issues like subsidies, if we are to reduce government debt. I hope all political parties will act in consonance in a bipartisan fashion.
This Budget is trying to move away from the concept of industry-wise sops. If the economy does well, Ibelieve foreign investors will invest in India. If it doesn't, why should they?
The key thing is to keep interest rates low and inflation under control. Then, demand will pick up across the board, without any sops. The strong agricultural growth in 1998-99 of more than 5 per cent should stimulate demand for products with a time lag of six to nine months.
Investment consultant P N Vijay is a member of the BJP economic cell.
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