The BT Budget MM Special: Debates; Growth: Up!....No, Down!

It will grow the recovery into a boom, argues FICCI's Amit Mitra, even though Budget:2000 has hiked the income-tax rates on individuals and companies...

We can, with some satisfaction, now say that the Indian economy is out of the morass. Since July, 1999, we have seen a turnaround in industry, reiterated by the bullishness in the stockmarkets. I believe that Budget 2000 will nurture this recovery, and that we are looking at sustained and enhanced growth, at least over the medium term. As the reforms implemented through the Budget become clear to industry and the common man alike, the Indian economy will, gradually, move towards greater global connectivity with liberalisation.

Most of India still lives in the rural areas, and the Budget has made creditable efforts to sustain and modernise this sector. Credit-flows have been increased by nearly Rs 10,000 crore, and the outlay for the Rural Infrastructure Development Fund has been enhanced by Rs 1,000 crore along with a reduction in the interest-rates. Equally important is the Pradhan Mantri Gramodaya Yojana for implementing programmes for the rural people. This will give a fillip not only to agro-processing industries, but also to sectors like tractors, harvesters, and combines as well as, of course, fertilisers. This will link up with the chemicals sector, and a chain reaction will then begin.

Infrastructure has been given its due by Budget 2000, and there will be a multiplier effect from the enhanced investments proposed by the government in roads and ports, steel, cement, electronics etc.. The Plan outlay for PSUs and the power sector has been increased to Rs 9,194 crore, with the provision of additional Central assistance of Rs 1,000 crore for modernising old plants. The National Highway Development Project will, finally, get under way, financed through the Re 1-cess on petrol and diesel that was earlier imposed.

The 7 canons of growth announced by the finance minister will lay the foundation for telescoping development. The budget invests heavily in the social sector, especially in education, drinking water, housing and roads, and healthcare. Since human resource development holds the key, schemes to enhance the literacy-rate, and tax-incentives to the private sector for setting up vocational education institutes in the rural areas dovetail with the concept of all-round development. A population policy is already in place, and the Plan allocation for lowering the fertility-rate has been increased by Rs 600 crore. The relationship between development, literacy, and family planning should now become visible.

The government is seized of the problem of its mounting internal debts, and the resultant higher interest-payments. Disinvestment is firmly on the agenda, and the proceeds will help reduce the government borrowings as well as reduce the drag of the public sector on industrial growth. The announcements about the reductions in the government's equity in non-strategic PSUs to 26 per cent, and disinvesting in the banks to the level of 33 per cent will, I believe, send positive signals not only to domestic, but also foreign investors.

The next decade is the decade of infotech, which is being promoted appropriately by Sinha. The easy availability of venture capital funds will add an impetus to the thrust, and a wide array of incentives have been provided to this sector. The telecom sector has also been made a thrust area. Entertainment has become a major industry globally, and India can grab a share of this market. Accordingly, we find reductions in the Customs duty on cinematographic cameras, film-rolls, foggy machines, etc..

I believe that the thrust given to the SSI sector is a major positive factor. It accounts for 40 per cent of our industrial production, and is the backbone of Indian industry. The positive impact of the Budget will translate into higher growth over a period of time. Already, one of the most objective judges, the stockmarket, has given it the green signal, and, after the initial downturn-which, I believe, was based on an inability to grasp Budget 2000's finer points-rebounded by 194 points on the second day, which, I expect, will continue.

Over the year, we should see the unfolding of the second phase of the reforms, which will further compliment the announcements in this budget. The only reservation I have is that the tax-rates on both personal and corporate taxes should have been reduced to their pre-1999 rates as the Laffer Curve holds in the Indian economy. So, this is a budget that is in keeping with the requirements of the economy. A growth-rate of 7 to 8 per cent per annum is well within our reach now.

AMIT MITRA is Secretary-General, Federation of Indian Chambers of Commerce & Industry

...No, Down!..
..But with interest rates unlikely to fall, because of the size of Budget:2000's fiscal deficit, RPG's D.H. Pai Panandikar contends that a slowdown is more likely.

By D.H. Pai Panandiker

Turning the recovery into a boom is out of question-for some more time. In fact, I fear that the economy may actually slow down next year. Already, some easing of the recovery has taken place. The November, 1999, figure for industrial growth is just about 3 per cent while we had 6.7 per cent growth in the earlier months. That's because agricultural production this year is going to be less by 2 per cent. Whenever there is a fall in agricultural production, we find a slowdown in industrial growth.

Looking closely at the Budget, we find that Finance Minister Yashwant Sinha has increased Excise duties-especially on some commodities, which bore an 8 per cent rate of duty earlier, but will now have to bear a duty of 16 per cent. Which means that there will be a straight increase in these prices. And industries like food will find it difficult to keep sales up because there will be consumer resistance. So, there will be some impact on the growth of some industries.

Industrial growth is also going to be influenced by new investment, and that is why we were expecting the rate of growth to be accelerated. But that is not going to happen because of two reasons. One is that the fiscal deficit is high. Sinha has budgeted for a fiscal deficit of 5.10 per cent of GDP in this budget whereas, in the last one, he had budgeted for only 4 per cent. This is going to have an impact on interest rates. Although the Provident Fund rate has been cut, if the government is there to borrow at 12 per cent, why should anybody reduce the interest rate?

If the interest rate is high, you cannot expect investment to go up. Moreover, the government then becomes the major borrower, and funds get transferred from the private sector to the government sector, and the interest on it keeps on accumulating. Unless these funds are freed, the additional investment necessary in infrastructure is impossible, which is, again, very important for a boom.

The other factor is that Sinha is now going to collect Rs 5,000 crore from companies in the form of a higher dividend tax. This will come either by cutting the dividend rate, in which case companies will not be able to float new equity issues successfully. If companies take it out from their retained earnings, they will have less capital for fresh investment. Either way, there will be added pressure on companies. So, investment may not increase in the near future, as we had expected. Thus, this budget is going to hit both industrial demand and investment, which cannot lead to a boom.

Since the 5.1 per cent fiscal deficit provided for in the Budget will mean an increase in money supply, that will create fresh demand in the economy. Some improvement in demand may, possibly, come through that route, but that will not be sufficient to correct all the other depressing trends of the Budget.

Then, Customs duty collections are supposed to fall by Rs 1,400 crore next year because of the cut in the peak rate from 40 to 35 per cent. This presumes imports will remain constant, thereby not impacting the existing balance. But this is a wrong assumption since the cut in the duty rates will mean more imports since they will become cheaper. Secondly, in April, 2000, 1,500 commodities will be off the quantitative restrictions, which will cause our imports to escalate. Even domestic industry could be hurt as, in the case of finished goods, the market will now be shared between locally-made products and imported goods. This might affect output too, and, unless the markets expand, maintaining the pace of industrial production will be difficult in the near future.

The best way of disinvesting is to sell an enterprise completely instead of keeping something in your hand that has really no meaning to you. If the government wants to control something, there are always means by which it can control it. So, the government should sell its corporations, or at least the controlling interest in them. And the proceeds from the sale of public sector undertakings should go to retire public debt.

This was a revenue-raising budget. Sinha wanted to bring down the fiscal deficit from 5.6 per cent to 5.10 per cent. Since only Rs 2,800 crore could be garnered by cutting subsidies, the finance minister must have thought that the rest should come through taxes. And so, he has raised taxes. But that cannot lead to a boom. So, it is unlikely that the recovery we have witnessed over the last quarter will translate into a boom in the coming months.

D.H.PAI PANANDIKER is the Economic Advisor, RPG Enterprises