THE BT BUDGET MM SPECIAL: FORUM
The Corporation Versus
A table with no edges hosts 15 fine minds two days after. The multi-polar panel of economists and CEOs tears into Budget:2000. The Vajpayee Administration delivers a rearguard response. Plug in for a replay of the ultimate CEO chat.
Anand P. Raman: Morning, everyone. Thank you for joining the BT brainstorming on Budget 2000. Given the nature of the reactions to the budget, we thought we'll structure the discussion into 3 sections. One, why are we feeling so bad after Budget 2000? Then, we should look at the implications of the budget for the economy and for your sectors in the short- and the medium-terms. Finally, since it is easy to be critical of our finance minister, we could, perhaps, try to discuss alternative methods of tackling the economic issues that confront the country. Tarun, our moderator for this discussion, is here in an individual capacity, and not as the Director-General of the CII. Over to you, Tarun.
Tarun Das: Thank you. There are 2 issues we are looking at. One, all of us share the national commitment of taking growth beyond 7 per cent, to 8 per cent, and even beyond. So, does the Budget take the economy down that road of higher growth? The second is that everybody around the country, and around the world, is concerned about the fiscal deficit, and the extent to which this Budget addresses the issue. On our side, we feel that too little may have been done... Bibek, why don't you kick off?
Bibek Debroy: I'll start off from where you left off, and express my general dissatisfaction about the Budget. Since 1991, the budget hasn't just been an annual statement of income and expenditure; it has also been the bellwether of the reforms. The fundamental problem with this Budget is that there is nothing substantial about the reforms, and we had been looking forward to that because the economy was in good shape. The big question, of course, is the fiscal deficit, which is 5.10 per cent of GDP. But, if you include small savings and use the old GDP, we are, probably, talking about something that's 7 per cent plus. Even closer to 7.50 per cent...
Subhashis Gangopadhyay: I do believe that the budget should be a tax-transfer statement because that's really what the government does: tax those who have, and pass it on to those who have not. In that regard, I think that the Budget has been unexpectedly bad... In the sense, when he has refused to cut down or make any actual plans about cutting down expenditure, the one thing the finance minister did do was cut subsidies. I think price-hikes for people below the poverty-line is unacceptable at a time when the government itself hasn't done anything to control its expenditure. When it comes to the fiscal deficit, what amazes me is the regularity with which we get our figures wrong.
N.K. Singh: Bibek made a point about the 5.10 per cent fiscal deficit target being inadequate, but I would really say that it is better to set targets which are realistic and realisable. Since he himself mentioned that the government's record in meeting the target hasn't been glorious, and the finance minister has set for himself a target-which, I believe, is realisable-it is sensible to achieve that.
The view that there is nothing substantial about the reforms, and that there was no macro vision is an uncharitable interpretation. The finance minister mentioned in his speech that the medium-term scenario for economic and social reforms has been fully articulated in the President's address (to Parliament on October 25, 1999). Also, I think that it is somewhat unfair to expect the budget to lay down in micro detail every element of the reforms package. The 1991 budget was a clear exception. The budget is not the end of the government's policy-making framework, which has to be a continuous exercise. Also, I think it is unrealistic to expect the budget to lay down a detailed strategy in terms of micro details with regard to every conceivable department and every conceivable aspect...
Das: Amal, could you offer us a financial perspective on the Budget?
Amal Ganguli: From a practising accountant's point of view, it can't be that simple for a bank with large Non-Performing Assets (NPAs) to go to the public and get capital. NPAs have always tended to be swept under the carpet, and this looks like sweeping them under the carpet further. Finally, the government coming down to 33 per cent equity-stakes in these banks, retaining the character of the public sector banks, and giving the boards autonomy seem to be totally contradictory statements.
Rajiv Memani: On the venture capital side, there's a lot of lip-service. I think everyone was also expecting legislations regarding e-Commerce and incentives related to the process of laying down a telecom backbone. ESOPs is another grey area, where I expected there would be more clarity; that options would be more employee-friendly. There's also, and this is a sensitive issue, no talk of opening up the small-scale sector.
Surjit Bhalla: The good part in the Budget is something that doesn't belong there. There are significant steps, particularly on the food subsidies, and a beginning on the fertiliser side. But the good news really stops there. A budget is supposed to have some macro-economics. This one is just shocking. The fiscal deficit this year, consolidated Centre plus State, is likely to be close to 11 per cent: 5.60 per cent at the states level, and above 5 per cent at the Centre. You can't raise people's expectations that you are going to do something about the fiscal deficit-and do everything in your power to increase it...
K. Ashok Rao: I am the odd man out here because I represent the trade unions, and for another, I represent the public sector, which are both not supposed to be in the reckoning today. Governance has become a green-room operation between private corporates, international capital, and the government. Having said that, I am concerned about the Budget's thrust about the public sector. There does not seem to be any consistency...
Das: Let's move now to the health sector...
Prathap Reddy: I feel sad that the government has not shown any direction at all for the world's largest industry, and the biggest employment-provider. The health sector has been totally omitted in the budget. The asset is that we have the human resources, we have the skills, we have intelligence, and we have proved it. There is another major asset that is going to be added: infotech. If infotech is added to healthcare, we can rapidly position ourselves as healthcare leaders in the world...
Ramalingam Raju: There are lots of positive steps, as I see them, in the Budget: the FII limit increase, the venture capital statements, lower Customs duty on hardware... There are certain things that I would have liked to see: steps encouraging the growth of the Net, which could have been achieved through reducing taxes on set-top boxes and network equipment. ISPs (Internet Service Providers) being treated as infrastructure did not happen.
There are 2 areas I would like to stress. The first is the message that is sent by the export tax. We have talked about 20 per cent being progressively applied for 5 years, after which all the incentives will be eliminated. This is worrying because we have not managed to increase our revenues, but we have managed to send wrong signals to the marketplace. Second, it is important to recognise that we are entering a virtual world. What it means is that the basis on which economies grew in the past has now changed. The Net is a recent phenomena, and we are not taking it into account.
Sunil Mittal: The statement that the key drivers of the Indian economy are infotech and telecom was, indeed, heartening. More than that is the simplification in a number of areas. You cannot imagine the kind of energy that can be released in not having to maintain those Excise records. Specifically, in telecommunications, a lot has been done during the year. I think FDI will be led by the telecom sector this year. On the more general issue of interest rates, I agree that the finance minister could have given stronger strokes to direct the RBI to lower them. But the token signal of reducing the General Provident Fund rate by 1 percentage point is in that direction.
Nandan Nilekani: The strong emphasis on infotech and telecom is heartening because that is the centre for creating employment, entrepreneurship, and increasing the flow of investment into the country. Therefore, measures like increasing the FII investment and venture capital guidelines were all positive. There are two or three things that we would have liked to have had much more clarity on.
One is, of course, on ESOPs. The industry view has been that ESOPs should be taxed at the point of sale because, in the last 4-5 years, we have been able to create a mechanism where individuals who live here have been able to create wealth. That has been a strong incentive for people to stay back in India. The other issue is of acquisitions. As we all know, acquisitions in the global market have to be done in stealth, secrecy, and in timeliness. For that, companies need resources. Therefore, some kind of flexibility in the limits for acquisitions would have helped.
Singh: I had explained in the interaction with the CII that the Budget does signal a movement towards greater capital convertibility. Namely, the ability of Indian industry to acquire equity and assets abroad. This requires that you have a more flexible ceiling, you move away from allowing what is permitted for industry in the area of infotech, make it more general, relax the ceilings, and the utilisation of the amounts generated from ADRs and GDRs for acquisitions abroad. Between the Reserve Bank of India and the Ministry of Finance, we are working out the modalities for doing so...
K.V. Kamath: There was no bitter pill in the Budget, as I see it. We saw an almost 2 per cent decrease in our interest rates between January, 1999, and January, 2000. The signal continues that the government would like to see lower interest rates. I welcome this because, if we do not correct our interest rates now, Indian industry is dead. On the banking front, there is a freeing up, but, again, the pronouncements are tentative.
On the tax front, the dividend-tax hike from 10 to 20 per cent, as back-of-the-envelope calculations show, is insignificant. It has created more of a negative feeling than it should have had, but there were other ways in which this could have been made up rather than introduce the dividend-tax and take the feel-good factor out of the whole marketplace.
The export tax had to happen, so, I am not negative on that. I totally endorse the clarifications that Nandan has mentioned because I think it is absolutely appropriate that this whole issue about ESOPs be resolved once for all. On the issue of overseas acquisitions, I would have expected bolder steps. Why should there be any limit on acquisition at all? If you are making an acquisition with the money that you raise abroad, and this money is in dollars, put conditions, not limits. Why $50 million or $500 million or even $1 billion? Acquisitions give Indian companies the same level field that foreign competitors have when they look at the Indian market. As long as they can raise money independently, that does not add to the borrowing burden of the country.
Das: We must move back to NK. He is like the lone ranger, articulating the government's defense...
Singh: The discussion began by the question: why is the feel-good factor missing? The short reply to this is that expectations were high. Pronouncements by the Prime Minister and the Finance Minister had led people to believe that harsh steps were in the offing. And then, it was a bit of a come-down in comparison to the kind of expectations that have been raised.
Let us look at the Expenditure Budget of the government as a whole. I think that Rs 225,000 crore, or more, is non-Plan expenditure. Of that, more than Rs 100,000 crore is on interest liability. Then, there is some expenditure which is really on revenue account; some of it is devolution to states, and some of it is on the establishment costs of the government. What are the elements where the government, in the short run, could have compressed expenditure? And have those options been exercised or not?
Raman: Our calculations about the rate of growth implicit in the Budget reveal 12.20 per cent growth in nominal terms and 7.20 per cent in real terms. Assuming an agricultural growth rate of about 4 per cent, and services at 8 per cent, we are really talking about something like a 9 per cent rate of growth of industry this year. In the light of what NK said about a stable reforms and macro-economic framework being created by this budget, would you agree with the proposition that this rate of growth is achievable?
Bhalla: Paradoxically, I am optimistic about the growth for the year. It has specifically nothing to do with the Budget. Growth is likely to be close to 7 per cent. Inflation is unlikely to achieve the nice target that has been brought out. I think it is going to be less than 3 per cent. Therefore, nominal GDP growth is going to be close to 10 per cent on the lower side, and is going to create a problem for the fiscal deficit next year. The reason I am optimistic is that the financial markets will discipline the government.
U.R. Bhat: The stockmarket, traditionally, has been expecting lots of sops, particularly sector-specific sops. But it has really matured over the years. What is required now is macro initiatives. So, if anything is to be done, it is to encourage R&D there, venture capital funding there, and that is where I think initiatives have not come. For example, in R&D, especially in the pharma sector, lots more should have been done. Secondly, an investor in an equity-oriented, open-ended mutual fund does not pay any tax. For him, it is free of all tax, including on dividends. The venture capitalist takes much bigger risk. But he has to pay a 20 per cent tax. This can't be explained.
Das: Mr Subbu, what do you think this budget is going to be like for the manufacturing sector?
B.V.R. Subbu: I can see the points that Raju made about the potential that infotech has to take this country out of the morass that it has been in, and how the manufacturing sector has, perhaps, not lived up to its potential. Well, the finance minister has also recognised these things. But I would ask: while you do create islands of prosperity with infotech, telecom or whatever, can these create virtuous ripple-effects on the rest of the economy? What impact will it have on the sizeable disparities in growth and social imbalances and tensions that we come across?
Debroy: We will get that GDP growth rate of 7 per cent. I would have said 6.50 per cent to 7 per cent despite the budget, not because of it. On the PSU reforms part, yes, we have the roadmap outside the Budget, but roads in India are not particularly good. I have no problem with the finance minister saying that PSU reforms will be done outside. But I have all kinds of problems when he also uses the Budget to say that we will not close down public sector banks...
Raman: That's right. Let me ask Surjit and Subhashis if they could come back on what NK said on how the macro-economic framework of the Budget hangs together.
Bhalla: Let me start off with ESOPs. I read in the papers today that, somehow, they didn't want ESOPs to be tax-free because they could be misused. This is a popular thing in the Indian lexicon. I don't know much about ESOPs, but if I came from another country, what should be an ESOP? That it should be taxed at the time of sale. It's a no-brainer.
Singh: This is an area which, certainly, deserves attention, and we will try and see how this can be rectified as we go along.
Das: Mr Kamath said Indian industry is going to be dead.
Bhalla: It is dead... In the stockmarkets, all the infotech stocks are up by 8 per cent, and all the non-infotech stocks are down by 3 to 4 per cent. And, if you look at the non-infotech stocks in the last 7 years-and this is a record that has not been repeated in any other part of the world-the non-infotech stocks have not moved up. With the interest rates, the labour laws, and taxation that we have, it is no wonder that they are dying. And I think this Budget has made efforts to speed up their death. So, I want to salute them while they are alive. It's impossible for Indian industry to survive.
Next, the story on real interest-rates. Among the developing countries worldwide, for the last 30 years, the median real deposit rates have averaged 1 per cent. In India, that rate is 8 per cent. There are people in the ministry, and elsewhere, who say you exaggerate the effect of small savings because small savings are small savings, and are really not involving anybody. Let me just say that, in 1998-99, small savings as a percentage of time deposits was 31 per cent on a flow basis. Small savings as a percentage of market borrowings was 40 per cent.
Singh: The core of the problem is not really the flexibility which the RBI governor is expected to exercise. The core of the problem emanates from the interest that the government itself is paying on things like small savings. The 1-percentage point reduction at a time when inflation is really running at only 4 per cent may, or may not be an adequate response for reducing the liability on interest payment. But that is an issue on which much greater support is needed from the state governments, who have now routinely come to regard small savings as a means of advance. We have a better ways-and-means advance than the Expenditure Secretary is able to give because the Central government bears a brunt of the 11 per cent interest payment, and for them, it is easy to garner large sums of money. That is something which requires to be re-visited in the course of the year.
Das: Do you want to conclude with a growth forecast?
Singh: Let me say 7.50 per cent on growth and 4 per cent on inflation.
Bhalla: My forecasts are that the growth-rate is easily 7 per cent, not because of the budget, but because, at the end of the year, I think we will have lower interest rates because the non-infotech sector is going to get massacred, and this has already stared to happen from yesterday. This will force the government to act, and force it to change interest rates so that, at the end of this decade, India will be growing at 8 per cent, with inflation at less than 3 per cent.
Mittal: I am bullish. My forecast is 8 per cent. But I am slightly conservative on inflation, and expect inflation to be 4 per cent because of the adjustments that need to be made by the government during the year.
Gangopadhyay: We still talk about growth, we talk about the financial sector a lot, interest rates, and so on. And these are all easy to follow, but the basic thing is that we still have not woken up to what the government's role in India is. The government's role is not to run steel mills, not to get into the power sector, not to support it, there is no question about the government wanting to fund certain things. But when we think about the government, we always think that if it wants to fund something, it must actually go ahead and do it.
On a more specific issue, what India needs today is one of the basic things that the government has not been doing is the debt-recovery process. The Sick Industrial Companies Bill has been drafted, and is still waiting there. The debt-recovery processes have to be there. Whatever you may do, the financial sector cannot survive without a proper debt-recovery process in place. I really don't know what the government is doing on that. Of course, it's building new Debt-Recovery Tribunals. But, since 1993, their performance has not been satisfactory at all.
Finally, we talked about knowledge-based industries. We cannot have a knowledge-based industry leading the recovery in India when we have so much to achieve in terms of education, primary health, etc.. These are things that I think the government should be doing. And if you really want the budget to be a policy statement, you just need to write down these two lines that this is what the government is going to do. The rest will follow. As for the growth forecast, I am a bit pessimistic about inflation. I think it will be more than 5 per cent. I expect growth to be around 7 per cent.
Subbu: I will be happy if we see the kind of growth numbers that my economist colleagues are talking about. Manufacturing business, ultimately, entirely depends on the growth in the economy. We would like to see growth leading to more car-sales, truck-sales, and so on. But I am not sure if 7 per cent GDP growth is possible. I would, probably, think of a lower number than that. It would depend on the way the agriculture sector moves. I think inflation would, probably, cross 5 per cent as Subhashis mentioned...
Gangopadhyay: With the CSO, you can always expect 7 per cent growth...
Debroy: Just before the Budget, we had the Economic Survey, and although the correlation always does not exist between the Economic Survey and the budget, this survey set out certain concerns. And none of them has been addressed in the Budget. So, the entire Budget, as far as I am concerned, has picked up only one sentence-and that is the last sentence in Chapter 1, which says ''there will be rapid economic reforms wherever necessary.'' And the only clause that the Budget has picked on is the ''wherever necessary'' part of it.
Das: I hope it does not say, ''wherever possible?''
Debroy: I think the Economic Survey was not drafted well... One of the issues that has not cropped up so far is the increased fiscal deficit at the level of the states, and increased regional disparities. It's not a problem that will go away, and we can't hang Bihar. One of the ways to discipline the states is to link allocations to states on the basis of reforms programmes that they carry out: user-charges and things like that. Do I see that happening? No.
On revenues, all I know is that the budget-making exercise deploys the ceiling method-which is, I look at the ceiling, and pick up a figure! And one of the problems of the budget figures is that nowhere do you have a GDP figure explicitly. Implicitly, you have a nominal GDP figure that you have to work backwards from, and try and figure out what the figure is. So, essentially, I just have an arbitrary figure on the revenues.
Coming to privatisation, I would like to iterate something that Kamath said: if you intend to get good valuations for many of these PSU shares, this is the time to do it, before competition comes and drives them down. Maruti is one being the obvious example. The other issue is the government's huge wage-bill. Have we done anything about the wages and salaries? No, we haven't. In none of these tough budgets. After all, Mamata Banerjee is around, so we can't do much, and so, we adopt the Humphrey Appleby kind of approach. And set up a commission and set up a committee and form an expert group-and do nothing.
Had there been no budget, I would have forecast a GDP growth of 7 per cent. And after the Budget, I will still forecast a GDP growth of 7 per cent. Let me just add one more sentence: as Subhashis said, economists are particularly bad at forecasting what happens in the future, they are pretty good at forecasting what happened in the past. So, I would expect a GDP growth of 7 per cent, and the inflation rate, I will go with 4 per cent.
Kamath: I see a resistance on the part of the banks to any dropping of interest rates. I think somewhere in the back of their minds is their arithmetic in terms of making their P&Ls work, and a fear that if you drop interest rates, the depositor is not going to put money in the bank. The point is if the system interest rates drop, people, unless they have other choices, are going to put money in the banks.
And, in any case, this should not hold back the government from taking decisions on the interest rates. This should be attacked with all the force that the Reserve Bank of India and the Ministry of Finance can muster. I quite agree that a 1 per cent drop is the wedge. What we should aim at is a 2 to 3 per cent drop in funding costs, including government borrowings. My estimates for the year? I think I would go with GDP growth of 7.50 per cent, and inflation at around 4 per cent.
Raman: It's my privilege now to ask Tarun, who has conspicuously kept silent through this process, about the 3 things he must have told the government to do, and they didn't. And what his growth forecast is.
Das: The budget did not go far enough for the knowledge industry. It could have gone further. It could have been more dramatic. ESOPs is one example. I am reminded of a statement made by Michael Dertouzos of MIT at a CII Forum. He said: ''Tomorrow morning, basically, we can earn 1 trillion dollars,'' and he worked it out. This was the time to, perhaps, give that push to this sector, to say that our vision for tomorrow is $1 trillion, and, then, go for it. That, I think, has not come through. Lots of good things have been done but that drive, that push to take it to $1 trillion, or near that figure, is not there. And we need to work in the next 2-3 months before the Budget is passed to see if we can bring some more of these elements into the Budget package to give that drive to it.
The second thing I would have liked to see is some attention to the traditional manufacturing industry. Thirty-seven per cent of our exports is still textiles, just to give one example. So, look at that as an area, and 90 per cent of that, by the way, is small and medium businesses contributing to exports. As for the forecasts, I will be a little bit conservative on growth, 6.50 per cent, and inflation, around 4.50 per cent.
Bhalla: There are several of us who believe that it is precisely this untapped potential that would do that much better if the government was not there. And, finally, what you said are the exact words to describe the Budget: lack of vision.
Das: Thank you.