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The pre-Budget charade

Published : Feb 19, 2000 00:00 IST

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D. SAMPATHKUMAR

IT is the Budget season, a season for all manner of interest groups, from dhoti-clad manufacturers to presidents of chambers of commerce in their pin-stripes, to seek budgetary favours from the Finance Minister. The art of presenting pre-Budget memoranda has been perfected even as its utility has been considerably discounted by those in the know of things in the Central administration. As one senior civil servant remarked: "These memoranda are never read. They are simply consigned to the Finance Ministr y's archives. If at all any policy change is incorporated in the Budget, it is due more to private lobbying than as a result of any reasoned argument in the pre-Budget memorandum."

Although industry is aware how such memoranda are handled, it finds it difficult to break the practice. But more important, as an exercise in public relations and because of the innumerable photo opportunities that it offers, the occasion of presenting a pre-Budget memoranda is hard to beat. Of course, the government does not complain either. On the contrary, it has every reason to welcome it, for such an exercise gives it an opportunity to present before the public an image of being responsive and sens itive to the needs of industry and other agents of the economic process.

As demands go, the industry wish-list is not much different from those presented in the past. These include a reduction in excise duties (some industrialists prefer abolition of duty in their case), a hike in the import duties on competing products, and a reduction in the import duties on raw materials used by it; a simplified tax administration; and the easing of conditions to access overseas capital.

The Finance Minister has an unenviable task on hand. He has to accept the needs of individual sections of industry for some fiscal protection, with possible adverse consequences for downstream/upstream industries of such a concession. Above all, he must not strain the government's revenues. Protection in the form of lower import duties on inputs to one section of industry means that domestic manufacturers of these goods have to contend with a lower cost of imported goods that compete with his/her own ma nufacture. On what basis does the Minister overlook the claims of domestic industry for a higher tariff wall against imports in the context of securing through fiscal policy cheaper raw material for downstream industry? If that is not difficult enough, t he presence of a public sector unit in the upstream sector producing raw material makes the decision even more so.

A classic example is that of the demand of the synthetic detergent industry that its raw material inputs must suffer a rate of duty that is not more than 60 per cent of the import duty on the product that it manufactures, should it be imported. While thi s is largely in place now, there is still an excess levy of three percentage points or so. Linear alkyl benzene (LAB), a principal raw material, is manufactured by Reliance Industries and by Tamil Nadu Petroproducts. How will the Finance Minister adjudic ate the conflicting claims of two sets of manufacturers? True, fiscal policy provides a broad framework: that inputs should suffer a lower rate of import duty than the end products so that indigenous manufacture is encouraged. But the question of the exa ct differential that should prevail between the two commodities remains. The affected units in the two industries and their political sponsors could still debate the question endlessly. In the world of realpolitik, even the basic principle may be given t he go by. The presence of a public sector unit may further complicate matters. In the present case, Indian Petrochemicals Limited, a public sector unit, albeit a marginal player, is also in the fray. The Ministry of Petroleum and Natural Gas would not ex actly be happy with a fiscal structure that prunes three percentage points of its profits on the sale of LAB.

An inverted duty structure, where end products enjoy a lower rate of duty while the input raw material or semi-finished components suffer a higher rate of duty, was inevitable. The manufacture of industrial raw materials typically involves the employment of a large workforce, often in the public sector. They are thus more vulnerable to competition from imports. Steel is a typical example. The engineering industry wants steel at a cheaper price, and this can be made possible by lowering the import duty o n steel. Domestic manufacturers would then have to peg their prices down to stay competitive vis-a-vis foreign suppliers. But such a policy could spell disaster for domestic steel manufacturers, especially the public sector Steel Authority of Indi a Limited (SAIL). Steel import suffers a basic customs duty of 35 per cent, that is close to the ceiling rate of 40 per cent which India has committed to the World Trade Organisation (WTO). Common sense suggests that as a principal input in the manufactu re of a whole range of goods, steel should attract a duty starting from 10 to 15 per cent, so that manufactured articles can be pegged at rates close to 40 per cent. But the government is in no position to do this.

Even with a 35 per cent duty protection for domestic steel, SAIL has posted a loss of approximately Rs.2,050 crores. Any further reduction in import duty will ruin SAIL. No government can order a fiscal policy that runs a public sector company to ground and hope to stay in power. So, there is very little chance of the government paying heed to downstream users' pleas for a more rational duty structure between raw materials and processed goods.

The solution lies in the core sectors of manufacturing becoming more competitive globally. If steel has to become competitive, the power and mining sectors should first become competitive. This apart, the intrinsic process of steel-making should itself b ecome more cost-effective. Questions of competitiveness raise issues of social and political processes that currently appear to defy solution. Therefore, Budget preparation and the submission of pre-Budget memoranda will remain a charade rather than an a id to policy-making.

(This story was published in the print edition of Frontline magazine dated Feb 19, 2000.)

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