FM JASWANT SINGH: Will he, won't he?

Scenario I: China, Here We Come

Circa February, 2004: Gathered at CII's (or FICCI's, if you please) headquarters in New Delhi are captains of Indian industry. The mood can't be rosier. The first half of the fiscal has seen the economy surge, and the numbers suggest that the gross domestic product (GDP) will grow by a record 8 per cent. The Sensex is hovering around the 5,000 mark, exports have bounced back and how-India will end fiscal 2003-04 with $55 billion in exports-agriculture is showing signs of upping growth to an impressive 4 per cent per annum, and even manufacturing is on a roll.

The corporate chieftains packing the room are all praise for one man: Jaswant Singh, India's Finance Minister. But just how did Singh succeed in pulling off the near miracle? Simple. By doing what most economists and CEOs had been suggesting for years: removing the structural and policy bottlenecks that throttled industrial and agricultural growth for years, and providing a conducive environment for industry to grow and prosper. For example, not only is power cheaper, but more reliable and ports have got their act together.

Incredibly, the government's nemesis-its soaring fiscal deficit-has been contained, thanks to Singh pushing the Fiscal Responsibility Bill 2001, which enjoins the administration to bring down the fiscal deficit to 2 per cent and revenue deficit to zero by 2006. He followed it up by initiating critical reforms in the beleaguered power sector, thus winning back the confidence of private investors, most of whom had given up on the sector. For example, by ensuring passage of the long-pending Electricity Bill 2001, Singh made it easier for private players to deal directly with the consumers, bypassing the bankrupt state electricity boards. He also raised power tariffs significantly and persuaded many states to adopt the Delhi model of privatisation of transmission and distribution-the first step in reforming the power sector.

On the policy front, the fm made sweeping changes in the Industrial Disputes Act, the Factories Act and the Contract Labour Act to impart greater flexibility in labour laws, repealed the Sick Industries Companies Act, the Bureau of Industrial and Financial Restructuring (BIFR), thereby ensuring speedy bankruptcy, restructuring and liquidation process. And by scrapping reservations for the small-scale sector, reducing tariffs to just two rates-10 per cent for final products and 20 per cent for all raw and intermediate goods-and fully implementing the value-added tax (vat), the fm also ensured that there are no real constraints on companies wanting to grow or expand in the domestic market.

CEO SPEAK ON BUDGET '03
Onkar S. Kanwar, CEO & MD, Apollo Tyres	Habil Khorakiwala, Chairman, Wockhardt
"There won't be any radical measures, but moderate steps towards reform and deregulation will continue"	"The government should not only grant infrastructure status to pharma, but also offer duty exemptions."

Not content with all this, the reformist Singh also allowed 74 per cent foreign direct investment (FDI) in all banks, including the state-owned ones and 100 per cent investment in telecom, insurance and retailing. FDI inflow for the year: $9 billion.

But is such a scenario only in the realm of dreams? "It is not a pigs-may-fly forecast," contends Surjit S. Bhalla, President, Oxus Research. "There is virtually nothing that the politician, bureaucrat or industrialist can do to prevent the 8 per cent target from being achieved in the near future.'' Amen to that.

Scenario II: On The Road To Disaster

Same place, same people, and the same dark mood. 2003-04 is a year that India Inc. would rather forget. Jaswant Singh's wishy-washy budget has taken its toll on the economy. With the GDP growing at a lacklustre 5 per cent, tax collection slipping, and the fiscal deficit touching 7 per cent of the GDP, there are alarm bells ringing all around. The fiscal situation, already precarious, is now near the breaking point. The deficit of the Centre and states combined has touched 15 per cent of the GDP, and the country's sovereign rating is under the scanner of most international credit rating agencies.

But how did things come to such a pass?

IF I WERE THE FM Kirit S. Parekh, Director, Indira Gandhi Institute of Development Research (IGIDR)

The main objective of my budget would be to stimulate growth in the economy, and contain the fiscal deficit, but not in a way that would alienate voters. And to do that I would remove infrastructural bottlenecks and provide flexibility for labour deployment to increase consumer demand. In the power sector, I would have asked the Centre to put pressure on the states to reform quickly by asking the National Thermal Power Corporation to collect its bills from the state electricity boards (SEBs) in time. To further reform the tax structure, I would have implemented the Kelkar Committee recommendations in toto, but also ensured that the middle class understood the importance of removing the various tax breaks. Reducing government expenditure would also be one of my top priorities. I would focus on reducing the non-merit subsidies. Such as those in fertiliser and food and also implement the recommendations of the expenditure reforms commission. These measures should reduce fiscal deficit, accelerate growth in the economy and also carry the voters along.

IF I WERE THE FM Surjit S Bhalla, President, Oxus Research

The thrust of my budget would be on realising the true growth potential of the country. The focus, therefore, will be on increasing revenue and reducing government expenditure. To increase tax collection, I would implement the Kelkar Committee report on both direct taxes and indirect taxes, especially removal of the Minimum Alternate Tax (mat), the long-term capital gains tax and the dividend tax. On the expenditure front, to take care of the 60 million tonnes of foodgrains rotting in the godowns, I would drastically reduce the current subsidy level on foodgrains, do away with the Food Corporation of India and cut down on the yearly hike in minimum support price, which has skewed agricultural production in favour of rice and wheat. I would also eliminate fertiliser subsidy, since it only helps the fertiliser companies. I would also implement the N.K. Singh Committee report which had recommended allowing 74 per cent fdi in cellular services and 100 per cent in basic services. I would also align the interest rate on small savings to that of government securities (G-Secs) as announced by the then FM Yashwant Sinha in the last Budget.

IF I WERE THE FM Subir Gokarn, Chief Economist, CRISIL

As a finance minister who has to present his Budget in such trying circumstances, I would accept Kelkar Committee's recommendations on direct taxes, especially withdrawal of all investment-related exemptions. However, I would differ from Kelkar by allowing companies already enjoying exemption benefits the option of either continuing with the benefits for the next three years and pay higher taxes-the old regime-or pay low taxes but give up all exemptions. I would also eliminate the Minimum Alternate Tax, the long-term capital gains tax and the dividend tax. On individuals, I am all for removing all exemptions but at the same time raise the income-tax slab from Rs 50,000 per year to Rs 1,00,000. Taking a cue from the successful roads project, I would launch similar projects-especially those with smaller gestation period-that would not only result in asset creation but also widespread increase in wages. I strongly believe that the right combination of tax rationalisation and public spending will definitely have the economy growing at a much faster pace.

Simple. Electoral politics won over good economics. To appease the vote bank, the Finance Minister doled out sops like there was no tomorrow. To keep the votebank middle class happy, Singh raised the income-tax exemption limit from Rs 50,000 to Rs 1,00,000 per annum, reduced rates on marginal slabs, but also kept intact all tax exemptions available to the salaried in direct contrast to the Kelkar Committee's recommendations. The move is likely to cost the national exchequer a crippling Rs 13,000 crore.

The FM's largesse, however, didn't end there. Singh also refused to reduce subsidies on liquefied petroleum gas (LPG) and food. To keep his government's other loyal constituency (industry) happy, he not only did away with the dividend tax and the minimum alternate tax (mat), but also the long-term capital gains tax, which drained a few thousand crores from the state coffers. Cut in subsidies or the government's non-productive expenditure was not even on Singh's radar. Corporate India, meanwhile, is pinning its hopes on Budget 2004-05.

Scenario III: Now, Let's Get Real

Despite a cautious Budget, the economy stumbled along and delivered a 5.5 per cent growth in 2003-04. Agriculture is still in depression, but services and industry have gathered momentum. The men in the room have learnt not to expect miracles from the government, but to focus on improving their own efficiencies, finding new markets, and making the painful trek up to innovation. The 8 per cent growth dream remains just that: a dream.

The indifference could well be a hangover from the last year's Budget where despite the strong economic fundamentals-an-all-time high forex reserves, low inflation, buoyant exports, positive current account balance and a buoyant tax situation-the Finance Minister refused to "bite the bullet''. In a year, when as many as nine states were slated to go in for assembly polls, Singh chose to play it safe.

Against the best counsel of his own advisor Vijay Kelkar, the Finance Minister continued with the standard deductions for the salaried class or even the tax incentives for small savings. Tax breaks on housing and various infrastructure bonds were continued. The message received by industry: The fm is not interested in disturbing the comfort zone of the middle class. That meant there was absolutely no question of taxing agricultural income, given the violent protests that greeted Kelkar Committee's recommendations. The Budget too made no attempt to cut fertiliser or even the food subsidy, which actually helps the urban consumer rather than the rural poor.

On controlling its own runaway expenditure, the fm turned a blind eye. No attempt was made to either reduce the government's headcount or even substantially prune the subsidy bill. Labour market reforms and privatisation of public sector banks, too, continued to get only lip service in the Budget. Moreover, the cap on FDI in insurance (26 per cent), banking (49 per cent in private banks) and retail (zero FDI) continued to ensure that there was little fresh inflow of FDI into the country.

But for the market and industry, there were sops aplenty. The fm announced the abolition of dividend tax and the long-term capital gains tax to give a fillip to the capital market and make it attractive for small investors. That served as a catalyst for directing more money into equities. Also, the government did make some beginning at pump priming the economy-by financing new projects that had relatively smaller gestation period so that the political payoffs in terms of significant impact on rural incomes would be high. An interesting example of good economics and good politics.

CEO SPEAK ON BUDGET '03
Harshpati Singhania, MD, JK Paper	Ravi K. Sinha, MD, SRF
"The Budget needs to boost demand through reduced prices and by raising spending power even if it involves tax incentives"	"The Budget needs to take policy initiatives that will permit Special Economic Zones experiment to be taken forward"

However, it would not be correct to lay the blame of a tame Budget at the feet of Singh. He inherited an economy that was already in tatters, leaving him little room for manoeuvre. After all, despite a robust 20 per cent growth in tax collection-courtesy the industrial sector's strong performance-the government's revised fiscal deficit at Rs 150,000 crore still exceeded the budget estimate by nearly Rs 10,000 crore or equal to 5.8 per cent of the GDP. And with 80 per cent of the revenues going into non-productive expenditure such as subsidies, defence expenditure, salaries and wages, and interest payment, the fm has little left in his hand to talk about any massive investment plans.

The upshot: Be it Singh or any other fm, the only realistic option available is to push reforms gradually. What's critical and possible is making positive changes and building on them. No Finance Minister, including Singh, can have any excuse for not doing so.