FM Jaswant Singh: Read my bips

If the finance minister Jaswant Singh's Interim Budget for fiscal 2004-05 failed to buoy the Sensex, which closed 75 points down on February 3, do not fault the man. It was but a set of interim proposals- including a vote-on-account for four months' proposed expenditure after March 31, 2004-that would have to be ratified by the new government post-polls. The broad tax structure, thus, was held static, and major policy announcements refrained from.

Though there were still a few minor eruptions in Parliament ("Andaman" found amused echoes), the shorn version helped provide economic clarity. Only a few could escape the two big numbers that made observers sit up: 4.8 and 4.4. Expressed as percentage of GDP, the first is the soon-to-be-logged fiscal deficit for 2003-04, and the second is the fiscal deficit projected for 2004-05. "This is a quintessential Jaswant Singh budget," observes Sanjiv Goenka, Vice Chairman, RPG Group, "long on delivery, short on claim."

The relief is palpable in investment circles as well. According to C. Jayaram, Director, Kotak Mahindra Asset Management Company, the sharp cut in the fisc means that the world's credit rating agencies would look more favourably at India, which could then attract the foreign investment needed to take the economy to a sustainably higher-growth plane. The capital gains holiday is welcome too, though capital markets tend to be less responsive to specific sops than the bigger picture.

That's the reason that business observers would rather talk in broad terms, about the fm's efforts in favour of enterprise, aimed at boosting the so-called 'feel good factor' that gets more media airplay than the boring old factors of labour and capital. As Sunil K. Munjal, Vice-Chairman, Hero Motors, acknowledges, "The fact that the government used even this limited instrument of the Interim Budget to announce policy and procedural reforms emphasises its commitment to furthering India's competitiveness and economic growth."

Fiscal Formula

Fiscal 2003-04 ends on quite a triumphant note for the fm. While Singh deserves credit for the moves made by the government to tighten expenditure (by snipping some subsidies) and restructure the debt burden (through lower interest payments and debt-swaps), he owes much to the agricultural bounty and growth spurt seen in the second half of 2003-04. So dramatic has it been that current statistics put the year's GDP growth in the 7.5-8 per cent. Given that inflation has remained under 4.5 per cent (and interest rates low), this makes for a six-month phase of prosperity unprecedented in the Indian economy's history.

Growth has proved a good energiser. The corporate sector, after all those bouts of cost-crimping, reported bumper earnings. The government's tax and non-tax revenues exceeded budget estimates by Rs 3,370 crore and Rs 5,722 crore, respectively, even as privatisation receipts are set to top the estimates by Rs 1,300 crore once the gail and ongc issues are done.

If 2003-04's fisc was just 4.8 per cent, below the budgeted 5.6 per cent (and 2002-03's actual 5.4 per cent), the year's revenue deficit at 2.9 per cent was significantly lower-an indication that the fm has begun correcting the spending bias towards running the government apparatus. This is critical if 'Plan' funds are to be freed for development projects to overcome the ill-effects of the country's primitive infrastructure.

Tarun Das, Director-General, Confederation of Indian Industry (CII), is visibly overwhelmed by the numbers. "Higher growth, lower deficit and still more reforms-it's three thumbs up for the Interim Budget,'' he says, speaking for many an industrialist. Thinking of the days to come, Anand Mahindra, Managing Director, Mahindra & Mahindra, goes one better: "We will now see the benefits of a truly virtuous economic cycle-of higher growth, greater revenue buoyancy and steadily falling fiscal deficits.''

Beyond Subsistence

It was evident that the fm finally had a sense of space to push forth his pet ideas. He announced several new schemes and revised versions of old ones, aimed at some sector or the other. He extended some tax holidays, simplified many of the old cumbersome procedures and much else. The Rs 25,000 crore defence modernisation fund brought cheer to the men in uniform.

Otherwise, farmers seemed to be in for most of the special attention by way of budgetary largesse. However, the core of the proposals were formed by easier credit terms for them, a banking matter, rather than actual earmarked budgetary allocations. Tea and sugar producers got a special package. Plus, there are some of the customary pre-poll sops that FMs cannot resist.

Most baits for the government's middle class constituency had already been announced in the run-up to the Interim Budget, so the reworking of Central government employee's pay package was the only one worth noting. This measure, though, has alarmed many fisc watchers, bringing back haunting memories of the infamous super-hike in salaries implemented in 1998. The trouble with this new move, as C. Jayaram says, is that a domino effect on federal states could injure the country's efforts to curb the overall fisc (including state deficits). The dream of a lean and efficient government is likely to remain a dream.

In any case, there are some voices that are not at all pleased with the manner in which the fiscal problem is being addressed. Vinayak Chatterjee, CEO, Feedback Ventures, for one, worries that important developmental goals may have been sacrificed at the altar of fiscal consolidation. The fm's earlier plan of raising Rs 60,000 crore by "leveraging public money through private sector partnership, wherever possible'', as he announced for 2003-04, for infrastructure projects, has remained a plan only on paper.

This being a pre-election Budget, how seriously are the proposals to be taken? According to Subir V. Gokarn, chief economist, CRISIL, many of the fm's measures are basically "statements of intention with no fiscal implications'', given the silence on where the funding is likely to come from.

Fiscal Sustainability

FM's measures to please the farm sector, however, it is quite clear where the funds are supposed to come from: the banking sector. And this is another cause for anxiety, for it brings back nightmarish thoughts of another kind- of the 'directed lending' kind, to spell it out, from the closed economy days when banks were treated as government tools rather than independent entities.

Is the role of the market being rolled back? There is considerable confusion on this score, given how the answer would vary from sector to sector. The oil sector is one such picture of confusion, with little clarity on the market's role here. Would ONGC, BPCL and HPCL have to bear an increased subsidy burden for LPG and kerosene?

If the economy sustains its pace, on the other hand, the fiscal issue could sort itself out. The trouble is that it's still an 'if'. The 4.4 per cent fiscal deficit (and 2.9 per cent revenue deficit) projection for the year 2004-05 assumes a nominal GDP growth of 13.2 per cent. After deducting inflation of 4.8 per cent (as assumed), this translates to a real GDP growth of 8.4 per cent. Almost two successive years, that is, of growth above the Prime Minister's dream scale of 8 per cent. This would be nothing short of an economic wonder.

Is it, perchance, a realistic wonder? Yes, say some analysts, such as Oxus Research Funds' Surjit Bhalla. It's an achievable wonder, he says; even if agriculture can't do better on a bumper base, low interest rates would have to spark an industrial boom at some point or the other.

No, say others who ascribe all the excitement to 'blip service'. The post-monsoon boom of 2003-04 came on an acutely depressed previous year's base, and that was a fluke succession of performances. All in all, sustaining high GDP growth would require substantive progress of some sort. Broader market reforms, or some other structural change.