He's got the deficit on a leash, the markets on a roll, and the reforms going. But will that alone help boost growth?

By Seetha & Ashish Gupta

From what-if to yes-but may usually be a minor semantic jump; if the context of the discussion is economic policy, it is a major leap of faith. It was a jump of that nature that Finance Minister Yashwant Sinha managed to achieve on February 28. Perhaps it was the knowledge that nothing much was expected of him that drove the man to execute, in the little less than two hours the budget lasted, a complex routine of fiscal fillips, reform rolls, policy pirouettes, and other assorted varieties of economic calisthenics.

If Sinha's objective was to play to the galleries, he succeeded. Before he began his budget-speech, corporate India was sore with him for not being sympathetic to their needs; the middle class was nervous about the ills the budget would unleash upon it; and experts, ranging from out-of-job finance ministers to politicians who thought fiscal was a term associated with violence, were waiting to pan every word he uttered. Worse, less than two years after it had recovered from one recession, India Inc. seemed headed for another. GDP growth had slid from 6.6 per cent in 1998-99 and 6.4 per cent in 1999-2000 to 6 per cent in 2000-01. In the same period, the growth in industrial production had declined too, to 5.7 per cent in April-December 2000-01 from 6.4 per cent in April-December 1999-2000. To complete that litany of woes, the agricultural sector was virtually stagnant, and business confidence was low.

But Sinha's Comaneci-like floor-routine changed most of that (what it didn't change, it at least got people to temporarily forget). Suddenly, liberalised India's most pilloried finance minister, was the toast of the country. And the feel-good factor was back.

Everyone knew what was needed. Higher public investment in infrastructure to generate investment demand; containing the fiscal deficit and reducing administered interest rates to bring down the cost of capital; removing various surcharges on taxes to boost demand; and kickstarting second-generation reforms. It was just that no one expected Sinha to do all this. Yet, the formula Sinha unveiled on b-day was a heady mix of all these elements. Exults S.S. Bhandare, Consultant, Tata Services: ''This is a positive approach to an impossible situation.'' Echoes Dewang Mehta, President, Nasscom: ''I am very gung-ho on the budget.''

But is Sinha's formula just a mood elevator that will give the economy an ephemeral high, or is it a multi-vitamin tonic that will actually rejuvenate it? North Block insists it is the latter. Says Rakesh Mohan, advisor to the finance minister: ''This is not just to boost sentiment. It is to work on the economy as a whole.''

Will Investments Happen?

They could. The 1.5 per cent cut in interest rates on small savings is the harbinger of a softer interest rate regime. The message was picked up by the Reserve Bank of India (RBI), which cut the bank rate by 50 basis points the day after the budget, its second adjustment of that magnitude and direction in a fortnight. For an industry burdened by an average interest rate of around 14 per cent on borrowings, this was great news. Says Mohan: ''This was a major investment signal.''

There are other budgetary-proposals that will increase money supply and lower the cost of funds. Like the lower fiscal deficit, which will keep government borrowings down. Explains R. Seshasayee, Managing Director, Ashok Leyland: ''The moment the government moves away from the loan market and stops crowding out the private sector, the cost of borrowings will come down.'' What's more, the reduction in dividend tax and the scrapping of various surcharges on taxes will lead to a huge saving on the tax outgo of companies and add to their distributable surplus. And money locked up in small savings could well be put to more productive use in the debt and equity markets. The markets, predictably, went on a roll immediately after the budget. They did lose most of their buoyancy two days later due to inherent weaknesses, although even the fact that the Sensex lost most of its budget-gains by shedding 176 points could indicate (albeit weakly) that the finance bill isn't all that it could have been.

The real question is whether access to cheaper funds will translate into fresh investments? Bhandare is not so sure, pointing to overcapacity of 25-30 per cent in most sectors. His scepticism is shared by the capital goods industry, where growth has been stagnant and capacity utilisation has ranged between 30 and 50 per cent. Dhruv Sawhney, the Managing Director of Triveni Engineering, doesn't see the sector growing at more than 2 per cent in the coming fiscal. Ajit Kumar, the Finance Secretary, doesn't share this pessimism. Demand for fresh investment may not be immediate, he concedes, but it will definitely follow increased capacity utilisation.

So if this budget is largely about the medium term, what about growth in this fiscal? D.H. Pai Panandikar, the Director of RPG Foundation, explains that if the tax revenue target of Rs 2,26,649 crore is to be attained, the industry will have to grow at 9 per cent. How will this growth come about?

Argues Mohan: ''The short term will take care of itself if the medium term is taken care of. If you look only at the short term, you won't get very far.'' He gives the example of the roads sector that is finally poised for take-off two years after the road cess was launched. Kumar expects steel and cement offtake to pick up by June since the roads programme is well on track. Indeed, in the capital goods sector, it is those companies manufacturing construction machinery that appear upbeat. Larsen & Toubro, for instance, sees the proposal to complete the Golden Quadrilateral Highway project as significant. The company's fabrication equipment division, expects its capacity utilisation to zoom from the current 85 per cent to 100 per cent in the coming year.

Mohan sees something similar happening in the power sector. A far-sighted investor, he reasons, should realise that the reforms initiated will make the sector viable three years down the line and start investing now. The cynical power sector, though, isn't lighting up with joy. Says Rajendra Srivastava, Country Manager, Electricity de France: ''The budget has little impact on the sector.'' So Bhandare may well have a point when he says the budget will trigger a consumer-led revival, not an industry-led one.

Will The People Spend More?

The abolition of the surcharge on income tax could increase the discretionary income of consumers (although some quarters claim that taxing people on the basis of their cost-to-company salaries would actually have an opposite effect). The rationalisation in excise has made many consumer goods ranging from cars to food products more affordable. Teruo Ishii, Managing Director of Sony India, expects a clear push in the demand for consumer electronics. The auto sector is also honking in delight. Venu Srinivasan, President of the Society of Indian Automobile Manufacturers, expects the market to grow at least 5 per cent in 2001-02. That's big news for an industry that is set to end this fiscal with a negative 3 per cent growth.

The food processing sector is also salivating with delight over the excise exemption it has got and expects consumers to gorge on processed foods. That may actually help increase incomes in rural areas. Points out P.M. Sinha, Chairman, PepsiCo India Holdings: ''The emphasis on the food processing industry will help create backward-forward linkages between farmers and processors.'' That should prevent the estimated 35 per cent wastage of farm produce.

What's more, increased allocations for rural infrastructure and the proposed review of the Essential Commodities Act, 1955, are all calculated to improve farm-productivity and rural incomes. Says Anil Sharma, Principal Economist, National Council of Applied Economic Research: ''It is an atmosphere in which the private sector will feel comfortable to invest.'' And this, points out, Pradeep Kashyap, President, Marketing and Research Team, should lead to overall prosperity in the rural areas, pushing up rural demand that accounts for 50 per cent of overall demand. Of course, everything will depend on the monsoons. If they fail or if rainfall is below normal, it will be a big blow to rural incomes.

Is All This For Real?

Rural incomes can be protected against such vagaries if various structural problems in agriculture like restrictions on movement of agricultural produce and the small size of holdings are tackled head on. Similarly, there's no point increasing liquidity in the financial system or generating both investment and consumer demand if the industry is hampered by a hostile operating environment. Which is why the gamut of second generation reforms-labour law reform, downsizing of government, privatisation-that the budget flags off becomes crucial for growth.

That's also why the finance minister's promise of amendments to the Industrial Disputes Act and the Contract Labour Act is enthusing industry. Points out Surinder Kapoor, Chairman and Managing Director, Sona Steering: ''In a competitive environment, you must give managements the right to manage, which was taken away by the labour laws.'' Concurs Sanjiv Goenka, the Vice-Chairman of RPG Enterprises: ''The relation between an employer and employee must be contractual.''

Whether the amendments will go through is still an uncertainty. Labour ministry bureaucrats have kept these amendments ready for the past two years. And senior government sources say the Labour Minister Satyanarain Jatiya was himself blocking them. Unfortunately, Sinha and his officials can do little to push through second-generation reforms, most of which concern other ministries (like the labour law amendments) and state governments (like agriculture sector reforms). As Ajay Kapila, Vice-President, LG Electronics says: ''We will have to see the implementation in the coming months.''

As Panandikar point out: ''For growth, the statements of intent must change into action.'' So, for sentiment to equal growth, there has to be follow up. Kumar promises this will be done. ''The reforms won't get derailed,'' he promises, ''the government will keep pushing the programme without losing focus.'' Mohan seconds this: ''We want to take growth to the next stage. We have identified the problems and are acting on each of those.'' That should be sweet music to India Inc.'s ears.

Continuing 

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