These numbers tell the real story: of an orphaned recovery,
of a lost opportunity to curb the government's soaring expenditure, and of plummeting CEO confidence. An exclusive BT-MDRA pre- and post-budget CEO Poll. 

By R. Sridharan

And that was the way the chips fell. Between the time he got up to present the budget-1409 hours on the afternoon of February 29, 2000-and the time he finished his budget speech-1600 hours-Union Finance Minister Yashwant Sinha said enough to depress corner-room sentiments that had been on an upswing since Kargil. Thus, the BT-MDRA CEO Confidence Index crashed from a 52-week high of 0.548 (on a 2-point scale) a day before the budget to 0.336, 24 hours after Let-Down Tuesday. But it wasn't the absence of a magic nostrum that could translate into a huge surge in end-user demand, or channelise more FDI into the country that caused widespread corner-room depression. It was, surprisingly, the lack of hard decisions regarding the fiscal deficit that did it. And CEOs, who had steeled themselves for the hard budget Sinha had promised them, seemed a little taken aback that the expected harshness took the form of minor rationalisations in duty-structures that would have done an accountant proud, but didn't really behove the finance minister of a country whose economy was, after 3 bad years, finally on a roll. But that's the way the chips fell.

In hindsight, India Inc.'s Budget blues were unbudgeted for. And it took barely a few hours to turn CEO India's fervent hopes into cries of despair. Sure, Union Finance Minister Yashwant Sinha had warned that his third budget would be harsh; that the fiscal deficit was ballooning, and that it must be reined in. Else, the economy's nascent recovery would end before it turned into a boom. Equally surely, corporate captains believed Sinha. Indeed, they cheered him from their corner-rooms as he went around rallying support to push through what he promised would be an austere Budget:2000.

Somewhere in their heart of hearts, CEOs believed that the millennium's first budget would be trend-setting. After 3 years of recession, the economy was clawing back into recovery. The New Economy was beginning to prove that it was no flash in the pan. Thanks to it, a home-grown billionaire had been born-for everyone to admire and emulate. Suddenly, an entire nation-that had spent its previous 50 years clinging to socialism, insulated from the world economy-was beginning to discover the joy and the riches of a free market. Surely Sinha's harsh budget would correct its chronic problems, and turbo-charge growth.

On February 29, 2000, Sinha proved true to his words. Except for a minor difference. The budget proved harsh not on the government's bloated bureaucracy or its vote-bank policies, but on a hapless corporate India.

Sinha had promised to get the government's gravy train going. CEOs thought he meant widening the tax-base, and not the doubling of the dividend-tax he ended up slamming them with. That's also the reason why they were unprepared for the tax on export income even though the World Trade Organisation (WTO)-dictated cuts in import duties were expected. Clearly, things did not quite turn out the way corporate captains had envisioned.

Knowing that such expectations rarely turn into reality, BT decided to map CEO India's pre- and post-Budget mindsets. We did that it in 2 phases: 2 days before the budget, and 2 days after the budget. In the first phase, the Delhi-based market research agency, MDRA-which conducted the telephonic poll-asked 172 CEOs in 5 metropolitan cities (Bangalore, Chennai, Delhi, Hyderabad, and Mumbai) about their most important expectations from Sinha. The issues thrown at them: the frightful fiscal deficit, the pending public sector privatisation, infrastructure investment, and higher economic growth, among others.

In the second phase, which began a day after the budget, MDRA went back to the same CEOs-161 of whom chose to reply-to find out whether or not the budget had lived up to their expectations. Only, this time BT also asked them to spell out what the budget would end up doing in the 1-year interregnum until the next budget. The idea was not just to compare and contrast the pre- and post-budget moods, but also to take a step back and look-from a corporate standpoint-where the reforms were headed in their tenth year since 1991.

The verdict on Sinha's handiwork is not flattering. In fact, the CEO Confidence Index plummetted from 0.548 just 2 days before the budget to a low of 0.336 after 2 days-a drop of nearly 39 per cent. That is the sum-total of the disappointment stemming from promises unkept. The promise of better roads, ports, and power plants, the promise of reduced red tape, and of policy clarity. ''It's a wash-out, a huge opportunity lost,'' gripes Abhijeet Raha, 33, CEO, Credit Lyonnais Securities.

Did He, Didn't He?
Railroading Reforms

When polled 2 days before the budget, our CEO respondents had expressed an overwhelming confidence that the nation's annual report would plan to take the deficit menace head on. Not surprising, considering that the Economic Survey, released just hours before B-day, put the key numbers out for all to see. At Rs 1,08,898 crore (5.6 per cent of GDP), the deficit looked set to balloon out of control. The CEO concern was so high that only 16 per cent of those polled ruled out any initiative in that direction.

Less than a day after the budget, the mood took a huge swing. Having looked at Sinha's provisions, a bare quarter of them believed that the fiscal deficit would be dealt with. A staggering 52 per cent ruled out reductions in the income gap. ''The target fiscal deficit is still high, and no clear steps to curb non-Plan expenditure have been out-lined,'' says J. Schubert, 52, Managing Director, Siemens.

Low government resources had prompted CEOs to believe that privatisation would be a big focus area in this year's budget. An impressive 60 per cent of the sample said that Sinha would put state-owned companies under the hammer. But, in the wake of the budget, less than one-third would buy the government's privatisation spiel. In fact, Sinha set a modest-and a historical-divestment target of Rs 10,000 crore.

With little money to spare, the government will falter on its infrastructure commitment, feel the respondents. Only a third of the CEOs still believed that private funds would come in. The number prior to the Budget: 60 per cent. The rank of rabid disbelievers had also tripled. It was ditto in the case of subsidies. Two-thirds of the respondents felt that subsidies would be curtailed compared to 46 per cent post-Budget. But the percentage of nay-sayers shot up from 14 to 37 per cent. ''The issue of subsidies has not been effectively addressed,'' points out Suneel Advani, 59, Vice-Chairman and President, Blue Star.

An area where expectations and reactions seemed to converge is indirect tax rationalisation. Two-thirds of the sample anticipated it, and nearly as many felt happy with Sinha's change over to the 16 per cent cenvat. It is to his credit that he stuck to simplifying indirect taxes; to a base 16 per cent in the case of Excise duties, and 35 per cent in the case of the peak Customs duty. In last year's Budget, he had moved a lot of products onto the higher 16-per cent level. For once, CEOs did not grumble. But this year, not everyone is happy with the upward clubbing of these rates. A big complainer: the FMCG sector. Says Meghna Modi, 26, Executive Director, Modi-Revlon: ''The 2 per cent increase in the Excise duty could affect end-prices marginally, hurting the consumers.''

Did He, Didn't He?
Cranking Growth Up

The unfortunate bit in the Budget, though, is its fallout on growth. Pre-Budget, nearly 6 of the 10 CEOs were confident that it would focus on stimulating growth. Consider what happened post-Budget: the optimists' rank shrunk to 38 per cent. More worryingly, 30 per cent of those polled said that the economy would not be stimulated at all. And the remaining 30 per cent expected it to clip along at the current rate. So, did Sinha squander the chance to catapult the recovery into a different orbit? Having gone through the fine print, two-thirds were categorical that he had."There is nothing in the Budget for the old-line manufacturing industry," points out Venu Srinivasan, 46, CEO, TVS-Suzuki. It seems that the common man could soon be joining the chorus. The reason: CEOs fear a slowdown in consumer spending because of the new taxes and the hikes in freight-rate.

More than one-third of the corporate chieftains polled were positive that higher prices will soften consumer demand while a quarter expected it to stay the same. That's in stark contrast to the sentiment recorded in the first phase of the poll. A good 52 per cent of the respondents saw their sales soaring in the new fiscal year, and another four-fifths did not see any weakening in demand. Despite the projected cut in consumer spending, corporate India's top brass is not saying that its sales will fall. In fact, only 15 per cent of them say that the Budget will not boost sales.

So, what explains the CEOs' belief that the topline will continue to expand? Partly because of the fact that there has been no Excise duty increase in any of the big-ticket items like cars, consumer electronics, or pharmaceuticals. And partly due to the fact that the new tax on 20 per cent of export incomes is not perceived to have created a huge barrier. When asked if the Budget would boost exports, three-fourths of the respondents said Yes; 19 per cent said that the levels would, more or less, remain the same; and only 5 per cent said that it will not help capture foreign markets.

Clearly, CEOs are unable to make up their minds about the extent to which the phasing out of export concessions will hurt. Says Ketan Mehta, 45, Director, Mastek India: ''The decision to tax export profits is a good move. It not only allows for a change in the mindset of exporters towards taxation, but also to plan their cash-flows.'' Others aren't convinced. More respondents believed that profits will be hit too. Consider this: 58 per cent of them said that their bottomline will be bruised, only 17 per cent saw their profits staying immune, and one-fourth said that there would be no impact.

The clutch of concerned CEOs would have been higher had Sinha not lowered by 1 per cent the interest rate on the general provident fund, and abolished the 2 per cent interest-tax on banks. More than one-half of our CEOs did expect the Budget to make finance cheaper for their companies. While, post-Budget the number of hopefuls came down by 3 per cent to 50 per cent, the negligible drop indicates that few believed that the Budget could do anything about lowering the cost of capital. But that's not to say that hopes are not perking up. Says A.C. Muthiah, 57, Chairman, spic: ''We are hopeful that the finance minister will soon correct the increase in the dividend-tax.''

Did He, Didn't He?
Helping Consolidation

Expansion, market development, and consolidation are on top of the corporate agenda. And the Budget does not seem to make any significant impact on them. When asked prior to the Budget, 85 per cent of the CEOs said they will be focusing on market-expansion (37 per cent), on consolidation (25 per cent), and on expansion (23 per cent).

After the Budget too, the priorities were unchanged. Revealingly, austerity gained in importance. Earlier, only 12 per cent of the CEOs thought belt-tightening important. In come mat, export-, and dividend-taxes-and 18 per cent of India Inc. wants to shed flab.

The biggest let-down, it seems, was the New Economy hype. A huge 85 per cent of the BT universe expected infotech to be given large sops in the Budget as growth-boosters. Another 13 per cent said that it would continue to be gracious to the New Economy companies. The picture was gloomy after the Budget. Only 56 per cent now expect the budget to push knowledge industry growth, and-surprise-17 per cent actually said it ignores the sector. Explains Anji Reddy, 57, Chairman, Dr Reddy's Labs: ''There is no mention of knowledge-based industries like pharma.''

Pharma, in particular, had been expecting sops for R&D, and tax-exemptions on licensing-fees and royalties. Nevertheless, the infotech sector did get its fair share of concessions, particularly the telecom and hardware sectors. And the relaxation in the FII investment limit to 40 per cent, and tax-breaks to venture capital firms will benefit the cash-hungry industry. ''This will help increase the inflow of funds to Net start-ups, and other service companies,'' says Raj Kondur, 26, Director, Chrysalis Capital. Adds Manoj Kohli, 41, CEO, Escotel Mobile: ''The telecom industry can now look forward to a significant acceleration of teledensity.''

Little done, vast undone. Many of the CEOs polled believe that the Budget does not address critical areas of concern. Despite Kohli's optimism, there is disappointment. A high 62 per cent of the sample were expecting the Budget to unleash the potential of the power and telecom industries. Also, they expected Sinha to simplify the regulations of mergers and acquisitions. In fact, more than half of the CEOs surveyed were confident that some kind of relaxations would be made for M&A.

The upshot: while the Budget is innocuous in several of its provisions, it hits hard where it hurts. It will take a lot of CEO India's ingenuity to negotiate the falling tariff-barriers, and the increasing assault on bottomlines. Whether the new tax on exports, and the hike in the dividend-tax were justified is not the issue any more. The deed, more or less, is done despite Sinha's willingness to take another look at some contentious provisions of his budget. The lesson for corporate India is that expectations, in the cold world of politics and finance, rarely turn true. Rather, India Inc. must learn to hope for the best-and prepare for the worst.

The CEOs quoted in the story may or may not have participated in the BT-MDRA CEO Poll.

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