Cover Story: Missing The Millennium Moment

Evaluate Finance Minister Yashwant Sinha's Budget:2000 not by the meagre results it may or may not achieve this year, but by the historic opportunity for the century it has squandered.

Betrayal. Bathos. And an opportunity missed-forever. An anti-climax masquerading as the first Union Budget of the New Millennium has damned us all to despair, committing genocide with our expectations, consigning our confidence to the chamber of horrors. It was not a good budget. It was not even a bad budget. It was, actually, a non-budget. What a million CEOs and managers, investors, and industrialists had hoped to get from the Union Finance Minister, Yashwant Sinha, was nothing short of a radical roadmap for stimulating high-octane growth in an economy already poised to hit the 7-per cent orbit.

For once, there wasn't even any doubt about how to get there. All he had to was to attack the fiscal deficit, which had mocked the budgetary projection for 1999-2000 of 4 per cent to stand at 5.60 per cent of GDP, lowering government borrowings, and allow business to access capital from banks at a lower cost than the current real rate of interest, which stood at an unreasonably high 10 per cent. Nor was there any debate over how this had to be achieved. In an economy delicately poised for higher growth, raising taxes would, obviously, be fatal. Instead, Sinha had to lower his expenses by downsizing government, and to raise revenues by embarking on a massive privatisation programme.

WHAT IT MIGHT HAVE BEEN

Count your blessings. Had Sinha chosen to attack the fiscal deficit at the cost of economic growth, business could have been bombarded by more taxes.

It might have been worse. Sitting as he is on a fiscal deficit topping 5.6 per cent of Gross Domestic Product (GDP), Union Finance Minister Yashwant Sinha could just have chosen to sacrifice growth at the altar of discipline, raising taxes ruthlessly to bridge the yawning gap. Consider this scenario: determined to lower the fiscal deficit to 4 per cent of GDP-against the backdrop of the inflexible demands of raising defence spending and lowering import tariff rates to comply with the World Trade Organisation's (WTO) agreement-the finance minister decides to raise a whopping Rs 15,000 crore by way of additional taxes.

Of that, the finance minister budgets Rs 2,000 crore from the personal income-tax, Rs 10,000 crore from the corporate-taxes, and Rs 3,000 crore from the Excise duties. This translates into an increase of 5 percentage points in the income-tax rates-from 10 to 15, from 20 to 25, and from 33 to 38-and another 5 percentage points in the corporate-tax-from 30 to 35. To get the rest, he slaps a 5 per cent surcharge on Excise duties across the board. Given this grim alternative, corporate India could even celebrate the fact that Budget:2000 has, actually, limited its new taxes to Rs 6,904 crore.

But would Sinha actually have resorted to such a patently growth-garroting strategy? Given his reluctance, or inability, to attack government spending in 2000-01-none of the exploratory steps for austerity that the finance minister has announced will come into effect in a hurry-raising revenues would have been his only option to lower the fiscal deficit. Sure, Sinha could have set ambitious disinvestment targets, but the track-records of successive government, including the present one, in this area has been poor. So, had the pessimistic pragmatist in Sinha come to the fore, Budget:2000 could have been a truly taxing one for business, growth, and the revival.

The time was ripe: it was the symbolic beginning of a new century. A stable government, all set to last 5 years, was in place, with Prime Minister Atal Bihari Vajpayee firmly in command. The foreign exchange coffers were overflowing with a record $31.94 billion. Companies had shrugged off the recession and were back in the black. The party on the stockmarkets showed no signs of easing up. The rate of inflation had stayed under 4 per cent for a year.

Is it any wonder that hopes were higher than they had ever been, especially with Sinha threatening (read: promising) tough measures, which everyone interpreted to mean tough on the bloated bureaucracy, on ballooning bills, on the ponderous public sector? Is it any wonder that the Bombay Stock Exchange Sensitivity Index, a.k.a the Sensex, had shed its customary pre-budget circumspection to put on 117.61 points on the day before B-Day? Is it any wonder that incredulity mounted-not at the measures presented in Budget:2000, but at the measures that were left out?

For, Sinha did nothing-repeat, nothing-to airlift India's economy into the high-growth-path through the simple steps that had been charted out. Instead, he served up a pot-pourri of measures for rural development, a couple of tax surcharges, an ostensible rationalisation of the Excise duty, a token lowering of import tariffs, and a basket of assorted trivia whose direct impact will be micro-measured in rupees and paise-at a time when it should have been gauged in terms of globalisation, competitiveness, and double-digit growth.

Of course, if growth-by-default is all that we wanted, we could have stated categorically that Sinha has not presented a bad Budget:2000. Says Bibek Debroy, 44, Director, Rajiv Gandhi Institute for Contemporary Studies: ''This budget does nothing for growth. There is no growth stimulus. Anyway, irrespective of what the budget does or does not do, the economy will grow at 6-6.5 per cent. So, Sinha may get the 7 per cent growth he has assumed.''

Look beyond the short-term results of his measures, and you will find nothing to short-circuit the economy-even if some companies feel the pinch because of the doubling of the dividend-tax from 10 to 20 per cent and the tax on export earnings, which will be offset by the excise duty rationalisation and the procedural simplifications. Says Hari Mundra, 49, CFO, RPG Enterprises: ''Although Sinha has not done anything to stimulate demand, he hasn't done anything to kill demand either.''

But then, that was not what we were looking for. We wanted a charter for transforming the economy-for taking the government out of the business of business; for returning the fulcrum of growth to the manufacturing industry, where the big investments and the jobs come from; for stoking mega-investments. We wanted, in short, a budget with a vision for the next 5, 10, and 20 years.

Instead, we got a budget with its eyes set vacuously on the government's finances for 2000-01 only. A budget incapable even of summoning up the boldness required to balance the books. A budget that, by its very measures, is already becoming irrelevant to the future of India's economy. A budget that, therefore, can only be judged not on what it seeks to achieve-which is precious little-but on what it does not even try to address. Sinha had his chance to leave his stamp on the economic history of post-liberalisation India, and he squandered it in a minefield of minutiae.

Time and again, he back-pedalled when he should have been pulling ahead furiously. He knew he had to reduce interest rates to get investment growing again-gross domestic capital formation in 1998-1999 was 0.4 per cent lower than the year before-but all he could do was to cut the interest rate on the General Provident Fund from 12 to 11 per cent.

He knew he had to cut food subsidies, but all he did was to set up a scheme whereby people above the poverty line will no longer get their foodgrains at a subsidised price-conveniently forgetting that it will take years to classify citizens suitably and implement the scheme. He knew he had to privatise-but he harped on the public sector identity that State-owned companies would retain post-disinvestment. Worst of all, he knew he had to attack the fiscal deficit ruthlessly, but he only tried to peg it down a notch: from 5.6 per cent to 5.1 per cent of GDP.

Perhaps it is unreasonable to expect a strategy from an inveterate tactician, to demand long-term vision from a committed fire-fighter. But it is not unreasonable to expect the best-and not to be happy with merely the good. That, unfortunately, is what India has got from Budget:2000-a tale full of deficits and defeatism, signifying nothing.

In his very targets for growth is revealed Sinha's lack of ambition. The finance minister's proposals imply a 7.2 per cent growth in GDP-a nominal growth rate of 12.2 per cent and 5 per cent inflation: probably contributed by 4 per cent growth in agriculture, 8 per cent in services, and 8.8 per cent in industry. While he can do little about the first, the second and the third still do not signify a high-growth economy. If he has accepted defeat already in his efforts to accelerate growth, just how can Sinha ever hope to raise the economy to a higher plane?

As Sunil Bhandare, 54, Director, Tata Services, points out: ''The budget has been losing its significance. As a direct stimulus for growth, the role of the budget has been declining.'' And that's dangerous. Continues Bhandare: ''However, through its directions and strategy, the budget can create the feel-good factor. Unfortunately , that strategy push is not there in Budget:2000.''

What Sinha has forgotten, for instance, is that the fall in the agricultural output last year will lead to a drop in rural demand. Couple that with the 1.5 per cent of the income of the top-bracket of tax-payers that he is usurping by raising the marginal rate from 33 to 34.5 per cent, and the result will be a distinct shrinkage in demand-at a time when companies have not yet started manufacturing to full capacity.

And while his emphasis on the New Economy is in tune with the volume of activity in this segment, the fact remains that sustainable, investment-led growth can only come if the manufacturing industry leads the growth rate-preferably with a double-digit figure. As economist S.L. Rao, 62, points out: ''This is a budget of immoderate expectations, and moderate methods to achieve those expectations.''

Don't forget, either, that as much as 0.7 percentage points out of the 5.9 per cent economic growth achieved in 1999-2000 came from the Pay Commission-induced windfall for government employees. Take away this deficit-widening largesse, and the growth-rate of 5.2 per cent does not exactly signal that the economy has already built up enough steam to chug past the 7 per cent-mark as Sinha expects it will. And while their monetary impact may not be much, the additional taxes could have a disproportionate effect on growth. Predicts Bharat Doshi, 51, Executive Director, Mahindra & Mahindra: ''Corporates will now have to face stalled growth.'' Echoes D.D. Rathi, 53, President and CFO, Grasim Industries: ''Sinha has, actually, ushered in a phase of technical stagnancy.''

But then, the absence of a vision for a sharply-defined post-reforms economy, with Budget:2000 as the starting-point of the journey towards fulfilling it, is, obviously, the biggest deficit in Sinha's turn-of-the-century testament.

Of course, judging Budget:2000 in terms of its short-run impact on corporate bottomlines-which will, undoubtedly, be hit by the combination of reduced spending-power in the hands of consumers, the doubling of the dividend-tax, the end of exemptions on mat, and the tax on exports-would be as short-sighted as Sinha was in formulating his financial gameplan. For, Sinha was scrabbling to raise revenues that will show up in his books come March 31, 2001. So, bean-counters who moan about the fall in profitability will be complaining about the wrong issue.

After all, that dividends have to be taxed-whether in the hands of the giver or the taker-at a rate commensurate with that of personal income-tax can hardly be questioned. Sure, there will be a blip in taxes-worries Anil Singhvi, 36, Treasurer, Gujarat Ambuja Cement: ''The increase in the dividend-tax is too steep. It will unnecessarily burden companies that want to reward shareholders.'' But the principle is not at fault. Likewise, phasing out tax-exemptions is a step towards creating a transparent taxation framework, which, in turn, is an essential pre-condition for widening the tax-base and ensuring better compliance.

True, in the short run, the withdrawal of the incentive to exports-even if full export earnings will be taxed only 5 years down the line-may hurt the bottomline of export-intensive companies. However, with India plugging into the global trade model of the WTO, Sinha could hardly have continued subsidising exports. Explains Arun Firodia, 54, the Chairman of the Kinetic group of companies: ''Even if Sinha seems to have given in to pressure from the WTO to phase out all subsidies to exports, this is understandable.''

Of course, CEOs of many export-intensive companies are unhappy. Carps S.P. Oswal, 58, the Chairman of the Vardhaman Group: ''In the global market, we have more disadvantages than advantages. Everyone talks of the low labour cost in India, but that forms only 5 per cent of the production cost. Everything else, from power to capital, is more expensive in India than in the countries whose companies we compete with. The export incentives were necessary.''

Adds J.L. Deshmukh, 51, the Managing Director of Cummins: ''When export margins fall, domestic markets become more attractive. Infotech companies may enjoy great margins and markets globally, but what about the rest?'' But then, no CEO can really hope to escape taxes-and thus secure an unfair advantage over local competitors too-just because of high export-intensity.

Don't forget, either, the clear abandoning of the protectionist positioning that marked the earlier budgets. Even if the effective peak rate of the Customs duty, at 42.50 per cent, is only marginally lower than the earlier level of 44 per cent, the downscaling still represents Sinha's intention to plug into global trade by observing the same rules, instead of raising barriers. Analyses Debroy: ''If we exclude the items that are moving off the list of QRS, the average has probably come down.'' Indeed, Sinha is taking a Rs 1,428 crore cut in Customs duties, which speaks louder than anything else. Acknowledges Rao: ''Finally, he is abandoning the old swadeshi leanings.''

The real issue, however, is whether Sinha has provided the stimulii-or even created the pressure-points-for corporates to improve their competitiveness. Inevitably, the answer is no. For starters, he has done nothing to create the conditions for lowering the lending rate-for which shrinking government borrowing would have been essential. Second, he has provided no growth-pills for the manufacturing sector, which was essential to kick off a cycle of demand for intermediate goods and capital goods, leading to higher investment and employment-generation.

Most important, he has not stimulated competition further by easing the entry-norms and procedures for domestic and foreign capital, which is the only way that India's companies can raise their strategic and operational efficiencies. Therein lie the real reasons for India Inc.'s disappointment and outrage over Budget:2000.