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June 9, 1998

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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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