Budget Commentary/Mahesh Nair
Instead of a bang we had a whimper
I confess. I was one of the few who thought that on June 1 when
Finance Minister Yashwant Sinha presented the Union Budget we would
have an economic explosion. Faced with a crisis (post-Pokharan II),
I thought Sinha would take radical decisions. Just like Manmohan
Singh had done during the 1991 crisis.
I was wrong.
Instead of a bang we had a whimper.
Yashwant Sinha disagrees. He says he does not believe in announcing
any grand plans or road maps for the future of India's economic
direction. His sole intention is how to tide over the crisis now.
Not to chart out fancy targets for industrial or export growth,
foreign direct investment, and inflation. But to deal with matters on
hand-kick-start growth by increasing expenditure on infrastructure
and agriculture, and protecting the interests of the ailing domestic
industry.
In short, this is not a Dream Budget like Palaniappan
Chidambaram's.
Yashwant Sinha's is a Practical Budget.
But is it? The central claim of Sinha, and many of his supporters in
Indian industry, is that this Budget will alleviate their current
problems. Let us examine some of the radical reforms Sinha has
introduced to see whether this argument holds any water.
The strongest tool that Sinha has used to kick-start growth is the
so-called "huge increase in infrastructure spending". The Plan outlay
for energy, transport and communication has been increased by
35 per cent. Last year the Plan outlay for these sectors was Rs
452.52 billion. Sinha has increased it to Rs 611.46 billion this year.
So the extra Rs 150 billion will revive growth in these sectors,
right? Well, not really. There is a huge difference between what is
to be spent and what is actually spent. For example, last year
Rs 3.49 billion was to have been spent on the coal sector. According to
the revised estimates, only Rs 2.87 billion was spent. Ditto for surface
transport. Against the outlay of Rs 4.29 billion only Rs 3.20 billion was
spent.
What is the guarantee that this time around, with Sinha holding the
baton, these huge gaps between intention and implementation will not
reoccur? Have any new hassle-free guidelines been announced to
spur project implementation? No.
This is the worry of private investors in infrastructure projects.
Proper regulation and procedures are still not in place. The concept
of single window clearances for infrastructure projects does
not exist despite all the hype. Had Sinha introduced something on
these lines it sure would have kick-started growth. An announcement
of automatic clearances for Rs 15 billion-worth FDI projects in
these sectors (like the government has announced in power projects),
would have achieved more than mere raising of the Plan outlay.
There is also a spanner in the proposal to allow investments by
Provident Funds in the infrastructure sector. The FM made a provision
that 10 per cent of the incremental corpus of the PF would be made
available for investment. But there is a rider. These projects will
have to secure a minimum 'investment grade' rating from two credit
rating agencies. Past records show that barring entities like
IRFC, KRCL and NTPC no other agency has got dual ratings of
investment on a stand-alone basis. Almost all public sector offerings
have got only 'high safety' rating
It is unlikely at least in the near future that investment grade
ratings will be provided to power, water or road projects on a
stand-alone basis as the cash-flow risk is unknown. One solution is
that the state provides guarantees. But with most of the states
having a fragile financial system, it is unlikely this issue will
be resolved quickly.
Which means, despite Sinha's promise, there will be no release of PF
funds for infrastructure projects immediately.
Let us look at Sinha's offerings for the insurance sector. He has
thrown open the door for private Indian firms. But if you remember,
Chidambaram had thrown the health insurance doors for the
private sector last year. Yet why is that, after 12 months of
Chidambaram's Budget, no one has walked in through these doors?
It is the same reason why you will not see private Indian players
walking in before next year. For anybody to walk into the private
world of Indian insurance you first have to amend the existing LIC
Act and GIC Act in Parliament. According to the Parliamentary Affairs
Minister Madan Lal Khurana, the Bill amending these two Acts will be
introduced in the winter session of Parliament, not now. So
there goes yet another urgent radical reform of Yashwant Sinha to
alleviate the current problems.
One instance where Sinha's Budget is practical is his intention to
divest government stake in public sector units such as GAIL, VSNL,
MTNL, IOC and CONCOR to raise Rs 5,000 crore. These divestments
will happen for the simple reason that the Cabinet has already
cleared the decision! But whether Rs 5,000 crore will be raised will
depend a lot on when and how these issues are marketed.
As to the other proposals of disinvestment -- reducing government
equity in Indian airlines to 49 per cent and retaining only 26 per
cent in all non-strategic sector PSUs -- these are laudable
intentions but are unlikely to occur this year. And since we are
debating how Sinha's Budget is the stuff real things are made of and
will address immediate problems the less said about good intentions
the better.
Where Sinha has had an immediate impact is on the fortunes of
domestic industry with the implementation of the 8 per cent special
customs duty. Desi companies like TISCO, SAIL, Essar Steel,
Reliance, BILT, ACC, Gujarat Ambuja, IPCL, Videocon, NALCO and
HINDALCO all stand to gain. This 8 per cent special duty, plus the 5
per cent special cess which Chidambaram had levied, plus the 10 per
cent depreciation of the rupee, plus the existing customs rate will
confer on these domestic industries thedubious distinction of
having one of the highest tariffs in the developing world.
In the short run, this is wonderful news for the owners and
shareholders of these firms. In the long run, Sinha jokingly
says, we will all be dead.
Believe me, if we think protection and not competition will make our
domestic industries more efficient, we will really be dead in the
long run!
In the housing sector, Sinha's sops -- repealing the ULCRA, infusing
HUDCO and the NHB with more funds -- stand a better chance of having
an impact this financial year. If this is quickly followed up with
Urban Development Minister Ram Jethmalani's promise to speed up the
foreclosure procedure to introduce mortgage backed securitisation of
house loans, and states reducing stamp duties, then the housing
sector will be the sole one where Sinha's Budget will pass the
Practical Test.
But this apart, there is hardly anything in Sinha's Budget which
will have an immediate effect. All his major plusses -- increased
expenditure in infrastructure and agriculture, insurance reforms,
reduction of government equity to 26 per cent in non-strategic
PSUs -- will not come home to roost this year. Their fruits can be
plucked only after a year or so.
This is because in matters such as economic policy and the Union Budget
there is the leads and lags factor. In plain terms, it means what you
sow today, you reap tomorrow. Not today.
Interestingly, it is this leads and lags factor which will earn Sinha
cookie points. For he will reap in the benefits of what Chidambaram
had sowed last year. The East Asian crisis (fall in
exports), a senseless Pay Commission payout (which raised the deficit
by 0.5 per cent) and an erratic monsoon (a negative growth in
agriculture) had crippled Chidambaram's Dream Budget.
Sinha does not have to contend with any of these factors. The East
Asian Crisis has almost blown over and the weather pundits have
predicted a normal, good monsoon. And recent indicators
are heartening. Recent statistics indicate that six key core
industries -- cement, electricity, coal, power, steel, and
petroleum -- have registered a 6 per cent growth in April on a
year-on-year basis. Imports have also registered a 14 per cent
increase. These are small, but pleasant indicators.
There is a lot Sinha has to thank Chidambaram for. And it is
certainly more than what next year's finance minister will have to
thank this year's finance minister for.
Mahesh Nair
Budget '98
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