Cover Story: Missing The Millennium Moment; Pg 2

Trapped between 2 centuries, Sinha's budget is pinioned by pusillanimity. Asks Indira Rajaraman, 51, RBI Professor, National Institute of Public Finance & Policy: ''Does setting the fiscal deficit at 5.1 per cent, after it stood at 5.6 per cent in the previous year, amount to any kind of correction at all?'' Adds Debroy: ''If we include small savings and use the old series of GDP, the fiscal deficit amounts to 7 per cent plus, which means that we are back to where we started in 1991.'' When business was expecting him to be ruthless on expenditure, Sinha set his sights way too low.

Primed-and eager-for announcements of radical cuts in government expenditure, what business has got instead is lip-service to that cause. As he acknowledged in his speech, 85 per cent of his government's non-Plan expenditure-accounting for 74 per cent of the total bill-will go into interest payments (44 per cent), defence (18 per cent), subsidies (8 per cent), and salaries, allowances, and pensions (15 per cent). In none of these areas, barring subsidies, has Sinha made even an attempt to effect cuts. Indeed, paying its people alone will continue to account for a huge chunk of the bill, half the revenues that the government expects to collect from the corporation tax. So, this is where he could have started his cost-control from.

But Sinha has set no numerical targets for downsizing the enormous staff-strength of 3.8 million that the government is burdened by. Counsels Bhandare: ''Sinha could have, for instance, used the Rs 1,000 crore that he has set aside to retire internal debt-which is less than a drop in the ocean, with borrowings having topped Rs 100,000 crore-to offer golden handshakes, of Rs 5 lakh each, to 20,000 government employees.'' And the problem is palpable: for instance, the government's employee strength has grown by 30,000 in 1999-2000 over the previous year.

Just how much of a strain the government's manpower bloat is on its finances can be gauged from one simple statistic: out of the Rs 10,083-crore (21 per cent) hike in the Defence outlay that Sinha has made, half will go into meeting additional revenue expenses, including salaries. In other words, only Rs 5,295 crore will be used to improve the efficiency of the armed forces. Amazingly, the government's inability to even get its sums right is staggering; for instance, pension-payments overshot the target by a staggering Rs 4,173 crore. Says Debroy: ''If the government doesn't have a clear idea of how many people are retiring and how much the pension liability is, it has lost control over the budgetary process.''

Besides the cosmetic addition of the actual appointment of the Expenditure Commission promised last year, Sinha has done nothing to signal that he's serious about cutting the government's costs. On the contrary, he has added 2 departments: for disinvestment and for primary education. And yet, he had the golden opportunity of doing away with entire ministries and departments made redundant by liberalisation. Argues Arindam Banik, 40, Professor, International Management Institute: ''Ministries like those for steel, coal, commerce and mining are meaningless. This was the right time to take the bold decision of reducing their roles to just regulatory ones. Such concrete proposals are missing.''

WHAT IT COULD HAVE BEEN

Better believe it . If only Sinha had presented the full picture, the pieces would have fallen into place.

It could have been more meaningful-even without a single change in the measures proposed by Union Finance Minister Yashwant Sinha in Budget 2000. If only he had not presented his proposals as a piecemeal patchwork, but as parts are missing-his customers would have understood his motives. For, unambitious as it is, UB 2000 does offer a future of sorts for business-eventually.

Eventually, hopes Sinha, food and fertilizer subsidies will be phased out even as the administered price mechanism for petro-products is dismantled. Eventually, all the surcharges and special additional duties slapped on the direct and indirect taxes will be withdrawn, leaving a single value added tax, 3 rates for the Customs duties, 3 rates for personal taxes, and 1 for the corporate-tax. Eventually, constitutional amendments will allow a farm tax and a smaller government.

Given this destination for the economy, many of the measures introduced in Budget:2000 could have been presented as either milestones along the way, or temporary detours which will be eliminated soon. For instance, although the finance minister has retained 3 rates of the Excise duty in addition to the Central rate soon; only the compulsions of revenue-collection have forced him to continue with the higher slabs.

Likewise, the removal of the tax exemption on export profits as well as the withdrawal of exemption on the Minimum Alternate Tax is, actually, the first step towards creating a single, unified rate of corporate-tax on all profits, sans exceptions. Unfortunately, Sinha put in the bricks, but chose not to unveil the blueprint.

Adds Subir V. Gokarn, 40, Chief Economist, NCAER: ''Every individual ministry should have been made to calculate how much manpower it needs, and so on. But there has been no such effort.'' Perhaps there was not a great deal that Sinha could have achieved in 2000-01 by way of reducing government profligacy. But, as Rajaraman points out: ''The budget is not just about numbers; it is also about signalling. It is about marketing your intentions. Even a listing of the 69 projects identified by the zero-based budgeting exercise as redundant would have gone a long way towards enhancing the credibility of the cost-cutting.''

Worse, Sinha's expenditure-control assumptions are unrealistic too. The cut he expects to achieve in subsidies will be impossible because of the difficulty of targeting in the framework that he has erected. His hope to keep non-Plan expenditure (excluding defence and grants to states) growth down to just 2.9 per cent compared to 5.05 per cent last year is impossible to realise given that there isn't a single expenditure-control mechanism in place.

To explain away Sinha's timidity as a result of the lack of political will that must back hard decisions on cost-cutting in government may be easy. But if the first budget of a government with a comfortable majority-and looking set to last the course of 5 years-cannot take hard decisions, when will such steps ever be taken? Says Rajaraman: ''Sinha blew it. No other government since Rajiv Gandhi's has been so comfortably placed politically to execute a bold reforms programme.'' Suspect, therefore, is also the Vajpayee Administration's very commitment to a leaner and less expensive government.

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.

Conspicuous by its absence, as a result, is any step to reignite the reforms flame. Radical downsizing of government? Absent. Further liberalisation to ensure that foreign direct investment-dollars used for plants, machinery, and employment-and not for buying shares-surges? Missing. A dramatic privatisation programme? Dispensed with. A blueprint for euthanasia for brain-dead banks? Avoided scrupulously. Reconfiguration of government expenditure to shift from revenue towards capital spending? Beyond the frame of reference.

Only in the rationalisation of the indirect-tax structure and the simplification of the Excise duty assessment, alongside the lowering of the peak rate of Customs duty from 40 to 35 per cent, are any attempts at reforms visible. ''At best, there has been a halting movement towards second generation reforms,'' says M. Narasimhan, 72, chairman of the Administrative Staff College of India. ''The stress on the public-sector character of banks even after allowing the government's holding to fall to 33 per cent is perplexing,'' he adds.

Worst of all, treading the path of political caution-hoping, perhaps, that the BJP's allies in the NDA Administration will react only to the Budget speech and not to the follow-up decisions-Sinha has chosen to soft-pedal expenditure-control. Sure, his post-Budget utterances do promise a virtual freeze on new recruitment in the government, as well as tacit approval for State-owned banks and corporations to pass into private ownership while retaining the fig-leaf of PSU-dom. But, as evidenced by his inability to persuade key allies like Chandrababu Naidu's TDP and Mamata Banerjee's Trinamool Congress to back the reforms line, Sinha has, clearly, postponed the real reforms for another day.

WHAT IT SHOULD HAVE BEEN

We've missed the jackpot. Instead of timidly taxing business and individuals to raise money, Sinha could have gambled on high growth to slash his fiscal deficit.

There was a better way. Considering that Sinha's fiscal deficit target for 2000-01 is a modest 5.10 per cent of Gross Domestic Product, he should have found a different way to get there. Ideally, he should have gone even further, attacking expenses ruthlessly and stimulating growth by encouraging consumer expenditure-read: withdraw the surcharge on income-tax instead of increasing it-and moving more products into the low-Excise category. At the same time, he should have widened the tax-base dramatically.

Sinha should have based his calculations on a targeted growth of 10 per cent-plus in the manufacturing sector, and not the 8.90 per cent he has settled for and may not even achieve. Then, he could have hitched a ride on this growth to achieve his revenue targets. How? The industrial growth of 6.90 per cent in 1999-2000 earned the Exchequer a 15 per cent increase in Excise revenues. So, were that growth rate to climb to 10 per cent, Sinha would have got Rs 12,800 crore as additional Excise versus the Rs 10,500 crore extra that he expects to get through the changes that he has made. Likewise, his takings from the corporate tax would have jumped by 7 percentage points, bringing in an additional Rs 2,000 crore over the budgeted amount.

The essential pre-condition, of course, would have been a giant drive to privatise, setting a disinvestment target of, say, Rs 30,000 crore instead of Rs 10,000 crore, and using the proceeds to retire government debt. Simultaneously, Sinha could have set a target for cutting the government's revenue expenditure-which contribute 83 per cent to the total expenses-by, say, 2 percentage points. Collectively, these moves could have slashed the fiscal deficit by Rs 10,000 crore which, in turn, would have stopped the crowding out of private sector borrowings and lowered the interest rate, leading to investment-led-and not just consumption-led-growth. Best of all, this would have set the stage for continued economic growth. Sure, it would have been a gamble-but then, that's just what Manmohan Singh did back in 1993, and hit the jackpot. It could have been done again.

Ironically, the stockmarkets-the one constituency whose accolades are the most fickle-will probably recover from its knee-jerk 290-point drop on B-Day to resume its upward journey. Would that the logic of the markets-articulated by Vibhav Kapoor, 46, CEO, IL&FS Asset Management, who says: ''The budget hasn't got anything that will change the trend''-were applicable to corporate fortunes too.

But, inasmuch as Sinha hasn't attempted to influence flows of investors' capital towards specific sectors, companies, or instruments with sticks or carrots-besides the one bull-friendly move of hiking the ceiling on FII investment in individual companies from 30 to 40 per cent-he has allowed the markets to remain on their pre-Budget, New Economy-enamoured trajectory. Sums up Shankar Sharma, 37, Director, First Global: ''The budget doesn't matter anymore. While the government may be bankrupt, individuals are solvent.''

Therein lies the curious dichotomy in the future that Sinha has wrought for business. While he has done little-read: nothing-to inject growth boosters into the economy, he has not set up roadblocks for the high-fliers, either. Even at worst, it will be business as usual for corporate India; after all, if the fiscal deficit of 5.6 per cent in 1999-2000 still allowed industrial growth of 6.9 per cent, chances are that 2000-01 will be no different. Crucially, however, by doing too little, Sinha has also ensured that the best of India's companies can continue on their earlier path without a loss of momentum. Of course, Sinha did not plan it that way-but, at the turn of the new millennium, Sinha has managed to produce a budget that won't derail the economy, even if it doesn't put it on the fast track.

Reported By Jaya Basu, Arijit De, Roshini Jayakar, Roop Karnani, Dilip Maitra, Rukmini Parthasarathy, E.K. Sharma, & Sahad P.V.