Finance Minister Yashwant Sinha in effect moves the process of economic reforms out of the budgetary domain and into a broader terrain. As the euphoria of Budget 2001 evaporates, the pernicious effects of the reforms process sink in, spelling si gns of real trouble ahead.
FOR reasons that are at times rather mystifying, the stock market in India has been elevated to the exalted status of a barometer of the state of the economy. As Union Finance Minister Yashwant Sinha on February 28 unfolded his budget proposals, the mark ets showed a certain buoyancy. After he concluded his speech, the captains of industry who had assembled at the headquarters of the Confederation of Indian Industry (CII) in New Delhi pronounced it an unqualified triumph of the liberalisation process. Co nfident predictions were made that the sensitive share price index on the Bombay Stock Exchange (Sensex) would ascend to the stratospheric heights and top the level of 5,000 within a matter of days.
But in reality, the Sensex hovered precariously around the 4,000 mark, buffeted by conflicting expectations and a frenzy of speculative forward selling that short-circuited the buying mood. The over-extended positions taken by certain operators were then further aggravated by a rival cartel of operators who ruthlessly drove down the vulnerable scrips. The BSE president quit in disgrace, the statutorily empowered watchdog of the markets, the Securities and Exchange Board of India (SEBI) launched an inqui ry, and the Finance Minister repeatedly assured Parliament that the markets were in no danger of paralysis on account of broker defaults.
What was evident in the markets a bare 10 days after the Union Budget was not the exuberance of a bull run celebrating the revival of the faltering liberalisation process, but the disarray of a loosely regulated and undisciplined system. Although a buyin g frenzy was evident initially, prices never quite scaled the heights that had been forecast. Rather, the markets plunged into a serious payments crisis and the indices remained at the levels where they had been hovering prior to the Budget.
Obviously, the gathering at the CII, which included some of the most credible public figures from the community of industrialists, may have seen only part of the reality. The budget proposals that may have really engendered the euphoria were simply the t axation measures, particularly the removal of all but one surcharge on corporation and personal income taxes, the reduction of excise duties on certain consumer durables, notably motor vehicles, and the reduction of the rate of tax on dividends by 10 per centage points.
With the emphasis on the excise duties front being on a simplification of rates and the gradual elimination of exemptions, the Finance Minister has estimated that the yield would increase by the order of Rs.4,600 crores. On the customs side, there has be en an overall slashing of rates, leading to an expected decline in revenue of just over Rs.2,100 crores. And though changes in direct tax rates are expected to result in a revenue loss of Rs.5,500 crores, improved compliance and better administration wou ld, in Yashwant Sinha's assessment, make up for this.
Viewed in the context of the fiscal deficit, which is projected, perhaps rather optimistically, to touch Rs.116,000 crores in 2001-02, these tax initiatives must seem rather modest. That was clearly the principal cause of the initial euphoria that greete d the Budget. Rather than go in for the imposts that could cause a dent in the deficit, the Finance Minister chose to stick to the philosophy of lowering rates in the belief that this would provide an incentive for productive agents in the economy. This act of faith in the virtues of liberalisation was obviously the first cause of the euphoria that swept the markets.
CENTRAL to the Budget,though, is the reduction in administered interest rates on small savings and provident fund accumulations by 1.5 percentage points. Although this directly impacts on the earnings of millions of middle-income earners, the government' s calculation was obviously to relieve a part of the huge burden it bears on account of its accumulated debt. Tangentially, it is also a signal to the small saver that he or she should be focussing greater attention on unconventional savings instruments such as stocks and shares. For the edgy share markets, this was another vast stimulus.
Finally, however, the markets could not surmount the power of the broker lobbies, who proved that their gatekeeping function is always decisive in any encounter with expressions of investor sentiment. It is tempting, though, to view the lack of scruple o f the stock market cartels as the only irritant in an otherwise buoyant situation. This would, for anybody who believes that the stock market cannot for long outrun the performance of the real economy, be simply implausible.
It is a curiosity of the current mood that the profit warnings being issued with increasing regularity by some of the star performers of the stock exchanges - notably the information technology firms - have not quite been factored into calculations. In w arning that earnings for the current quarter could fall well below market expectations, many of these firms, including Infosys Technologies, NIIT Ltd and Wipro Technologies, have been gradually coming to grips with the realities of the global marketplace . The digital economy rapidly transmits stimuli - - whether positive or negative - from distant New York trading to the Mumbai market. And the crumbling of the key indices in the U.S. economy, notably the Nasdaq Composite of technology intensive firms, h as had a definite impact in the Indian context.
In their confident forecasts of a bull run in the markets, India's industrialists proved oblivious of global realities. If this Budget incorporates features that would tend to overwhelm these deeply imbedded structural constraints, these have to be sough t in the measures that the Finance Minister has introduced which are, strictly speaking, in the domain of other Ministries. Thus, the decision to allow retrenchment without prior clearance in all industrial units employing a thousand workers or less was announced without the formality of prior consultation with the Labour Minister, who would now be tasked with the contentious job of introducing the necessary legislation. The decontrol of sugar prices and the revisions to the drug control order were, sim ilarly, announced without broad consultations among all the Ministries involved.
Assuming that these irritants are sorted out, there is a whole new domain of negotiations with the States that this Budget has opened up. Three vital areas that the Finance Minister ventured into with greater recklessness than conviction - the revamp of State electricity boards (SEBs), the introduction of a new decentralised food procurement system, and the levy of user charges for services such as irrigation at commercial rates - would seem to call for a prolonged and perhaps contentious process of neg otiations with the States.
Since the plan to accelerate the reforms of SEBs was announced, a meeting of State Chief Ministers was held on March 3. The Central government held out an incentive that a one-time settlement of all "past dues" from the SEBs to the Central sector power g eneration enterprises would be considered, provided it was linked to a time-bound programme of SEB reform. It was also resolved at the meeting that sustained supply of power from Central sector generating stations would be linked to "demonstration of cap acity to make payments for current purchases and securitisation of past dues".
On March 5, the Central government announced the constitution of an Expert Group to work out measures to settle outstanding dues of the SEBs and to recommend a strategy to restructure their capital. Headed by Planning Commission member Montek Singh Ahluw alia, the group is expected to address the first part of its mandate within three weeks and complete the second part in another three.
There is a commendable sense of urgency over resolving a problem that has been in the foreground of policy debates for close to two decades. But how workable the plan would be, the financial costs it would impose and the distribution of the burden of adj ustment, are still unsettled questions. It has for long been a complaint of the SEBs that their capital base comprises entirely of interest bearing loan and that a part conversion to equity would dramatically improve their operational parameters. But the costs of this transition would have to be met and the Central government would be expected to bear a part. How far it would be willing to back up its exhortations to the SEBs with infusions of finance, remains uncertain.
Food stocks management remains another area where the States' vital interests could come in the way of any facile effort at change. A decentralised system of food procurement has been in operation in the States of West Bengal, Uttar Pradesh and Madhya Pr adesh since 1999-2000. The difference between the cost of procurement of grain and the Central issue price is reimbursed to the States as subsidy. In 2000-01, the total subsidy that was paid to the three states amounted to a little over Rs.250 crore. Thi s would seem a rather inconsequential figure when assessed against the Central Government's food subsidy of over Rs 12,000 crore. The provision for subsidy made in 2001-02 is Rs 13,675 crore. As of now, there is no reckoning of how much of this would be actually passed on to the states, simply because few states have indicated how they intend to respond to the new proposals. But the transition is unlikely to be smooth and painless.
Similar difficulties are more than probable in the provision of services like irrigation on a commercial basis. The measure directly impinges on the interests of powerful interest groups in state politics. And with Indian agriculture already in crisis, a ny such move could be politically expensive.
With all the attention to matters outside the budgetary process as conventionally understood, the Finance Minister has not quite been able to obscure the rather bleak statistics of languishing investments in vital sectors. Total Central Plan outlay in 20 00-01 is just over Rs.108,000 crores - over 7 per cent below the initial budget estimate. The shortfall in Plan spending has been acute in agriculture and rural development, as well as in industry and mining. But the social services such as education and health, and energy too have suffered seriously from the growing investment famine. Although the Finance Minister has budgeted for a 20 per cent increase in Central Plan outlay in 2001-02, there is considerable uncertainty with regard to the attainment o f this target. And if it is borne in mind that the weakening of growth impulses in the last two years have had a lot to do with bottlenecks in the energy and infrastructure sectors, there would seem ample reason to view the Finance Minister's optimistic projections with some scepticism.
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