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C O V E R S T O R Y May The Muse Be With Him We wish... We hope... We pray... ...that Finance Minister Yashwant Sinha does the right thing by the economy when he presents his fourth budget. By Seetha
As he sits down to frame his fourth successive budget, Sinha will certainly need the copious notes he took during those meetings. For the economy isn't exactly in top form. Both agriculture and industry are in the doldrums, investment is just not happening, the stockmarkets are sluggish, and inflation is raising its pernicious head once again. It's doubtful if Gross Domestic Product (GDP) will grow more than 6 per cent this fiscal. Yet, Prime Minister Atal Bihari Vajpayee wants a 9 per cent growth in this decade. It's a tough call. ''But achievable,'' says Confederation of Indian Industry (CII) President Arun Bharat Ram, ''a lot of things need to be done differently.'' So what does Sinha need to do? A lot, actually. A bit of old-fashioned Keynesian pump-priming of the economy to stimulate demand, some aggressive revenue mobilisation and rigorous expenditure management to fund this, and a whole lot of big-ticket reforms. Says a Planning Commission official: ''It's time for a bold approach-to step up public investment in order to pull in private investment.'' Agrees Amit Mitra, Secretary-General, Federation of Indian Chambers of Commerce and Industry (FICCI): ''Investment must be the mantra of this budget.'' Kickstart Growth
It's the rural economy that provides much of the demand that in turn drives investment. Says a corporate economist: ''Our real worry is about the pathetic growth in agriculture.'' Agricultural production, which declined 1.9 per cent in 1999-2000, is expected to grow a measly 0.6 per cent in 2000-01. Decline in capital formation (down from 10.1 per cent of gross domestic capital formation in 1991-92 to 5.5 per cent in 1998-99) has resulted in poor productivity and profitability. Asserts economist S.L. Rao: ''Investment in roads, dams, storage and post-harvest infrastructure has to go up.'' That's true for infrastructure, in general, really. The abysmal state of infrastructure is perhaps the biggest drag on India's economy. Rues R. Seshasayee, Managing Director, Ashok Leyland: ''Infrastructural investment of the order required has not happened.'' That's a pity, since infrastructure projects have tremendous spin-off benefits. Sinha, then, must heed what the India Infrastructure Report said about increasing investment in infrastructure from 5.5 per cent of GDP to 8 per cent for a 7 per cent-plus growth. Apart from spending its own money, the government needs to woo the private sector with attractive fiscal incentives like tax breaks and tax holidays. But the hurdle to higher investment is the high cost of capital. Laments FICCI President Chirayu Amin: ''The prevailing interest rates are much too high to allow the viability of new projects.'' But interest rates can't come down as long as government continues to run up huge borrowings. Till November this year, the government had already borrowed Rs 63,080 crore, 83 per cent of the budget target of Rs 76,382 crore. The interest rate on small savings also stands in the way of a rate cut. Declares Rao: ''The interest rate on small savings has to be cut.'' Simultaneously, the capital markets need to be revived. Says Amin: ''The primary market is completely lifeless, making it difficult for industry to raise additional funds.'' One action could see the country's bourses humming with activity again-the abolition of the 20 per cent dividend distribution tax which, even people who recommended its imposition now concede, is unfair. Says V.U. Eradi, Tax Consultant and former Member of the Central Board of Direct Taxes: ''It should at least be rolled back to the original 10 per cent.'' But the combination of more spending along with fiscal giveaways could play havoc with the government's finances, pushing up the fiscal deficit and, consequently, government borrowings. There's also the Fiscal Responsibility Bill stipulating that the deficit be brought down to 2 per cent of the GDP within five years. Fortunately, Sinha has better numbers this year. Finance ministry officials are confident the fiscal deficit will keep to the budget target of 5.1 per cent. This year has seen no nasty surprises like the Kargil war or the elections, both of which burnt a deep hole in the government's pockets last year. Balance The Fisc
Still, this year's fiscal compression will come at a price. Shortfalls in plan expenditure are estimated at between Rs 3,000 crore and Rs 5,000 crore. For industry, that's bad news. Affirms Seshasayee: ''Plan expenditure has to be stepped up.'' So how can Sinha spend more, yet keep the deficit in check? He must go for a variation of the tax-and-spend policy. The tax-GDP ratio has been falling steadily-from 16.07 per cent in 1989-90 to 14.18 per cent in 1999-2000. But there's little room to jack up tax rates. On the contrary, they need to be reduced and rationalised. S.V. Iyer, a former member of the Central Board of Excise and Customs, echoes the general sentiment: ''The 10 per cent surcharge on income tax and corporate tax must go.'' Rationalise Taxes Though the single-rate Cenvat introduced last year was a major step, the three additional excise duties only cluttered up the system. It's time, then, for the multiplicity of levies to end, even if it does mean lowering rates for some items. Will Sinha do it? Assures S.S. Bhandare, Consultant, Tata Services: ''The government won't lose revenue. It will gain through the buoyancy of growth.'' There's evidence of this. Excise revenue from shampoos increased from Rs 130 crore in 1993-94 to Rs 396 crore in 1997-98 when the duty was reduced progressively from 70 per cent to 30 per cent. A similar reduction in excise duty on paints from 40 per cent in 1991 to 14 per cent in 1999 saw revenue growing from Rs 187 crore to Rs 281 crore. It's possible to increase revenues given the present rates, explains Eradi, by widening the tax base and overhauling tax administration to plug leakages. That's the thrust of two reports from which Sinha is expected to draw heavily-the Govind Rao Committee on service tax, and the Parthasarathi Shome Committee on tax policy and tax administration reform. Sinha will certainly need to seriously consider the Rao committee's suggestion to net 20 new burgeoning services, including beauty parlours, cable operators, private diagnostic centres, jewellery and fashion designers and cargo services. What he should ignore, however, is the proposal to raise the tax from 5 per cent to 10 per cent. Warns Iyer: ''This will only encourage evasion.'' Of course, the need to tax the rural rich is self-evident. Spreading the net wide is no panacea. Says a Shome committee member: ''Expanding at the margins will yield very little revenue. It's important also to deepen the base.'' That's why the committee wants various tax-exemptions and concessions withdrawn. In direct taxes, the committee has suggested axing incentives for small savings, concessions to non-profit and charitable organisations, exemptions for 100 per cent export-oriented units and units in special economic zones and backward areas. It also suggests scrapping of various excise exemptions and questions the need for the multiple export promotion schemes, which alone are estimated to cause a revenue loss of Rs 21,000 crore this fiscal. That's not quite what India Inc. may like to hear, especially in these trying times. But there certainly is a case for reviewing all the exemptions to see if they are yielding the desired results, something the finance ministry is planning to do. As Eradi aptly puts it: ''All economic activity should sustain itself after paying taxes.'' Downsize And Withdraw But the government must also put its own house in order. Privatisation will have to get top priority, since it will release part of the Rs 2,30,140 crore locked up in its 240-odd public sector undertakings (PSUs). Points out CII's Bharat Ram: ''If the negative savings in PSUs are reinvested, the savings rate would increase from 23 per cent to over 30 per cent.'' It is also time for Sinha to push through a proposal (currently being blocked by the expenditure department of his ministry) to set up a Disinvestment Fund, the money from which would be earmarked for retiring public debt and social sector investments. Drastic cost-cutting should come next. Around 80 per cent of the tax revenue goes into non-productive expenditure-interest payments, subsidies, wages, and salaries. The government can't default on interest payments (set to overshoot the budget estimates by Rs 2,000 crore), but Sinha can clamp down on other heads of expenditure. He must start with some serious downsizing of government. The Expenditure Reforms Commission (ERC) has recommended a 10 per cent cut in staff by 2004-05, a ban on the creation of new posts for two years, and a Voluntary Retirement Scheme (VRS) for surplus staff. It has also identified various offices in the ministries of information and broadcasting, and coal that need to be wound up. Sinha must, at the least, announce a VRS for government employees, says economist Rao. Sinha would also have to wield the knife on the government's bloated subsidy bill (Rs 25,692 crore in 1999-2000). Pruning food subsidy (Rs 9,200 crore in 1999-2000) is still a sensitive issue but the ERC's suggestions on an overhaul of the operations of the Food Corporation of India could see substantial savings. What can be reduced, however, is the fertiliser subsidy. Points out RPG Foundation Director D.H. Pai Panandikar: ''A little tinkering with the fertiliser subsidy will bring down the subsidy bill from 14 per cent of the GDP to 11 per cent.'' All this is in the realm of the possible. Sinha can do all of it, some of it or none of it. The first option will see the Indian economy raring to go places a few years from now. The second will see it plodding along, even as smaller nations race ahead. The third will see it stagnate at present levels. Mr Sinha, the choice is yours. -Additional reporting by Ashish Gupta |
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Through
the second week of January, Finance Minister Yashwant Sinha did little
else than sit in Room 72 of North Block and listen patiently. To
industrialists, trade unionists, farmers, consumer activists, and
economists as they proffered advice on what exactly he should say on
February 28 to put the zing back into the economy.