Budgetary retreat

The most identifiable distinction of Budget '98 is the alacrity with which various proposals have been undone.

TO undo decisions in precipitate haste, after a phase of obdurate resistance, must count as one of the unique distinctions of the Atal Behari Vajpayee Government - next only to its propensity for rushing into adventurist actions without the slightest contemplation of the consequences.

The context for Finance Minister Yashwant Sinha's rapid reversal of budgetary proposals within ten days of presenting the Budget was perhaps set by the early travails of the Bharatiya Janata Party-led coalition Government at the Centre. The weeks preceding the Government's nuclear fait accompli of May 11 were distinguished only for an unseemly procession of ministerial resignations under the pressure of judicial stricture. And if Sinha's Budget of June 1 has any identifiable distinction, it is only in the alacrity with which various proposals have been undone under pressure from coalition partners.

In his most dramatic moment of retreat, Sinha only succeeded in underlining how vulnerable the fundamental calculations of the Budget were. One of his key proposals related to an increased import duty of 8 percentage points across the board. He was at pains to emphasise that this did not represent a regression to the ill-remembered days of protection for domestic industry. Rather, he said, the idea was only to neutralise the burden of domestic levies on Indian industry - a response, in other words, to the "legitimate demand for a level playing field."

The additional import levy obviously had varied implications for different sectors of Indian industry. Above all, it seemed to go against the philosophy of import liberalisation that has been an integral element of all Budgets since 1991, and perhaps even earlier. This was an impression that the Government, despite all the BJP's professions of the spirit of swadeshi, was anxious to dispel. In reducing the additional import levy to 4 percentage points, Sinha offered the rather disingenuous rationale that there would be no impact on aggregate revenue collections, since the depreciation of the rupee would offset the loss.

The plain fact is that currency depreciation is not a phenomenon that has a single-dimensional impact. It influences the volume of imports as well, in addition to the domestic price level in such vital sectors as petroleum and fertilizers. In drawing the rather simplistic inference that import duty collections would remain unchanged on account of currency depreciation, Sinha betrayed an anxiety to dress up abject retreat in sound principle. It was not an effort that carried much conviction.

A further recantation was apparent in Sinha's decision to withdraw entirely the urea price hike of one rupee on a kilogram. Earlier, pressure from the Opposition had compelled him to reduce the magnitude of the hike to 50 paise. He had then turned on the Opposition in vituperative rage, accusing it of using the interests of the agricultural sector as a fig-leaf for partisan motives. But in his reply to the debate on the Budget, Sinha seemed to come down from this lofty perch. An additional expenditure of Rs.1,600 crores on urea subsidy would be borne, he said, and offsetting revenues would be sought elsewhere. More than Opposition pressure, the demands of the BJP's coalition partners seem to have been the decisive factor behind this retreat.

AFTER all the assertions and subsequent disavowals, the lasting impression is of a Budget that seeks to perpetuate an established pattern, while making marginal corrections in a fiscal structure that is increasingly beginning to show the stress of many years of miscued calculations. In this sense, Sinha's budgetary debut encapsulates all the doctrinal conflicts and confusion of the party he belongs to.

What were the political motifs that were seeking expression in the BJP-led Government's first Budget? First, there was the urge to stand and deliver on the swadeshi commitment, after years of ideological fudging. Internal liberalisation has been an article of faith with the BJP - a process which supposedly is a necessary logical precursor to external liberalisation. More hard-headed critics were sceptical, since the structure of Indian industry made a neat demarcation between internal and external liberalisation rather difficult. Sinha had to resolve this conundrum by seeking a sweeping increase in import duties, mitigated only by selective decreases in some cases.

This proved less than palatable to the international investors whose favour the Indian economy has come to depend upon. Hence the hasty retreat after a momentary pretence of standing firm.

A second compulsion was to ensure that the global context in the wake of India's nuclear tests would not impede the sovereign right to pursue national security interests. The strategy worked out by the Government towards this end was anchored in the belief that official sanctions against India for its nuclear tests could be undermined and perhaps subverted by appropriate inducements to Western corporate firms and investors. Axiomatically, this was a compulsion that tended to undermine the swadeshi commitment.

Sinha sought an escape from this particular conflict of interests by extending a host of special privileges to non-resident Indians (NRIs), to invest in the country and fund its capital account. This must seem a rather feeble gesture, coming as it does after years of assiduous courtship of the NRI community by successive governments. Moreover, Sinha could not have been oblivious to the context in which he made his proposal - a decline in net inflows from NRIs from $3.3 billion in 1996-97 to $ 1.1 billion in 1997-98 Clearly, the NRI community is less than enthused by the persistent weaknesses on India's external account, which have led to a steady decline in the value of the rupee over the last year. Presumably, its confidence is not bolstered by the rapid fall in the value of the rupee since the Budget. Rhetoric may well be one thing - and the NRI community has shown some ardour in applauding the country's new status as a nuclear weapon power. But this is not yet backed up by a willingness to put their money on the future prospects of the Indian economy.

A third priority of the BJP Government was to reverse the legacy of many years of miscued revenue calculations, premised upon the assumption - at best weakly anchored in reality - that lower rates of taxation provide incentives for both productive investment and compliance. Lower rates means higher revenues and hence higher expenditures in essential infrastructure and the social sector.

This is a philosophy that achieved its ultimate expression in P. Chidambaram's Budget for 1997-98. But the disastrous fiscal outcome for the year has not led to a re-evaluation of the basic assumptions of the "dream budget". Rather, after soundly berating his predecessor while presenting his interim budget to Parliament in March, Sinha only proceeds on - even if only half-heartedly - along those same well-explored vistas. If anything, he only succeeds in creating an impression of arbitrariness, since there is no articulated rationale for either his tax rate increases or decreases.

THE positive features of the Budget are perhaps the increased outlays for infrastructure and certain of the social sectors. But experience shows that these sectors are among the first to feel the pinch when actual revenue accruals fall short of expectation. And the curious fiscal recipe that Sinha has adopted, in a domestic and global context that is undeniably hostile, makes such a shortfall more than likely.

The meeting of Foreign Ministers from the Group of 8 industrialised countries (G-8) brought further gloom. Overcoming early reluctance, the group as a whole seemed to go along with the U.S. demand that loans to India from the multilateral financial institutions should be blocked or delayed until it showed suitable remorse for its nuclear effrontery. The initial response of the Finance Minister was to reject any prospect of an "immediate effect" on the Indian economy. But the state of vulnerability is acute and the economy's dependence on the ephemeral moods of global finance extreme. Brave words today may well disguise longer-term anxieties.

Recent figures presented in Parliament by the Government tell a rather gloomy story. The fiscal deficit has remained resistant to the tonic of several years of liberal tax reforms, vital areas of the economy have begun lagging because of a persistent public investment famine, the industrial sector has faltered, and export growth is in a slump. Initial expectations that the economy would still ride out the impact of sanctions by the West were clearly not premised upon an objective evaluation of these realities. Rather, the belief that the foreign powers would not exert undue pressure, in their own self-interest, underlay this early confidence.

That prognosis was likely to falter on the current reality of a global financial system that is subject to violent instability. A minor perturbation at the margin in the prevalent situation could lead to an explosive upward spiral of disturbances. The recurrent spectacle of currency crises across the globe over the last decade tell their own story. Actual vulnerability apart, a perception of economic insecurity could set off a stampede of investors in the wrong direction. Economists who have spoken of the "herd mentality" as a powerful element in global economics perhaps knows a bit of what they are talking about. And, increasingly, it is becoming obvious that a Government that allowed national chauvinism to overwhelm strategic purpose is now finding that the costs of nuclear adventurism could well stick in the craw.