The Tribune - Spectrum

, February 24, 2002
Lead Article

Kick-start the economy, please

The Finance Minister has a tough task at hand as he finalises plans to usher in the much-promised "second generation of reforms." Taru Bahl surveys the country’s economic landscape on the eve of the Union Budget and concludes that recessionary trends can be reversed only through imaginative and bold measures. But can the FM do it?

THE government will be presenting its third Union Budget after being re-elected in 1999. Perhaps, like the year gone by, the captains of industry will analyse the Finance Minister’s effort at producing yet another "progressive Budget."

Kick-start the economy, please

But how progressive it actually is will be known as the months roll by and the economy tries to get over its yo-yo act of the last fiscal. The Budget will have to stabilise the economy and inject some optimism not just into the industry but also into the psyche of the common man and the regular employee whose insecurity levels have been on the rise. Industry skeptics feel that the Budget euphoria is mostly short-lived. The last Union Budget too was hailed by India Inc. as a flash of illumination in a climate of economic slowdown. Projections, however, went awry as sectoral initiatives came unstuck, thanks largely to a patent failure of implementation.

Attempts to revive the economy, which has been in the doldrums since 1997, have remained weak. Excuses like the Asian crisis, politics of coalition, the global economic slowdown and now the post-September 11 disruptions have made the aggrieved parties feel that the real problem is the government’s inability to inspire confidence by repeatedly demonstrating that it cannot govern. According to the Institute of Economic Growth, "Lower inflation, slow industrial growth, falling interest rates and declining foreign institutional investment inflows are in store for the economy over the next few months." A decline in money supply growth, an expected fall in petrol and diesel prices and the prevailing demand recession are likely to keep prices low. The WPI-based inflation rate for February, March and April is expected to be 1.37 per cent, 1.12 per cent and 1 per cent, respectively. Inflation based on the consumer price index is forecast at 4.96 per cent, 4.78 per cent and 4.6 per cent during these months.

The recommendations and report prepared by the CII on the Union Budget points out a sign of an upturn in the sectors of cement, steel, tractors, two-wheelers and consumer durables since October 2001. But these are over very low bases. The slightly higher growth in October-November has been less than the growth for the same period in 2000.

Budgetary wishlist

  • Essential drugs list to be pruned from the existing 254 exempted from customs duty to 100.

  • E-commerce transactions likely to be kept out of the income-tax net.

  • Imported liquor to become cheaper.

  • Led by small savings schemes, downward journey of interest rates to continue.

  • The Finance Ministry to set up an infrastructure equity fund with contributions from financial institutions, the LIC and the SBI.

  • Benefit of 10-year tax holiday likely to extend to the housing sector

  • Budget to focus on agriculture, food economy, power and urban infrastructure reforms by offering incentives for states undertaking reforms.

  • Additional 5 per cent duty on luxury items, including cigarettes, liquor and cosmetics, expected to raise funds for free compulsory education to children between 6-14 years under Sarva Shiksha Abhiyan.

  • Health ministry’s proposal may be examined to issue tax-free bonds (7-10 years) of over 50 billion rupees to fund creation of a health infrastructure throughout the country.

  • Beleaguered power sector to raise funds through infrastructure bonds at par with domestic financial institutions. Subscribers to enjoy tax rebate

  • Roadmap to bring all services under tax net and defining exemption limit based on firm’s turnover.

  • Approving a new pharmaceutical policy aimed at reducing trade barriers

  • Three-tier graded customs duty structure may be adopted.

  • Entertainment industry may be given the same status as infotech and communication sectors.

Despite the late marginal rally, the CII does not expect the real GDP growth to exceed 5 per cent for 2001-02. Key worry areas continue to be manufacturing, agriculture and the state of financial infrastructure. As compared to other Asian tigers like Vietnam, China, Indonesia, Philippines, Thailand and Malaysia, India ranks poorly, displaying an unbalanced economy having excessive services and too little industry. Growth has been poor and high external costs (high interest rates, power and infrastructure costs) are making it increasingly difficult to attract fresh investment

John Rutherfurd Jr, President and CEO of Moody’s Corporation says: "Tough measures are needed to bring down fiscal deficit. Security concerns for the country resulting from the political tension in the subcontinent and the global economic slowdown will be the main reasons for India not getting aggressively into fiscal consolidation." International rating agencies like Moody’s Investors Service, Standard & Poor’s and Fitch have therefore downgraded India’s rating. The fiscal deficit of the Central and state governments has been close to 9 per cent of the GDP for the last two financial years, and in the current financial year is likely to cross 10 per cent. He feels that India’s growth will be revived following the recovery in the economies of the USA and major European countries. Despite infrastructural bottlenecks, the country is likely to figure in the list of developed nations within the next 10-25 years. Rutherfurd Jr feels growth in the current phase lies in information technology and biochemistry. Groups like Hero have accordingly diversified from manufacturing to Information Technology by pumping crores in their Hero Serve and Hero Soft projects and also in their education and training foray on the lines of the NIIT.

Sunil Munjal, Managing Director, Hero Corporate Services Ltd, remarks: "These are sound projects backed by exceptionally competent teams but right now we are only in the spending phase and the returns will take a while in coming. We are hoping that our initiatives will pay off. Meanwhile, the fact that the industry is not doing well is amply demonstrated by the fact that every day we receive at least three proposals from companies wanting to shut down and sell their existing set-ups to us. This could largely be because they were short-sighted ventures not backed by sufficient expertise and lacking the wherewithal and funds to sustain themselves through the crucial gestation period."

Undoubtedly the electronic and IT hardware sector requires a conducive manufacturing environment. Considering the key role of information-based industries, India joined the Information Technology Agreement in March 1997. According to the Agreement, customs tariff on IT items are to be brought down in stages to zero. India had committed to bring down the tariffs on 217 bound items out of which 95 lines were to be reduced to 0 per cent by 2000, 4 lines in 2003, 2 lines in 2004 and the balance 116 lines in 2005. The Finance Ministry has been indicating that the schedule would be advanced to 2003 in which case the indigenous hardware industry would be affected. For a vibrant indigenous manufacturing base of IT hardware, it is necessary that customs duty on non-IT inputs should also be reduced to avoid inverted tariff structure. The high excise duty of 16 per cent is encouraging the grey market in PCs. Reduction of excise duty from 16 per cent to 8 per cent on all products will help in combating this grey market as also in reducing price and boosting demand. Most industrialists are hopeful that the Budget would have positive news on infrastructure investment. They anticipate a reduction in corporate tax and import duties. Most score cards for top Indian companies like Reliance, IDBI, MTNL, Shipping Corporation of India in the third quarter this year show a fall in net profit, citing economic recession as the reason for the downward trend. They say the market might look up only by next year. Harsh Goenka, chairman of the RPG group, says: "My guess is that it would be another two quarters before the market starts looking up. We think agricultural production should have its lag effect by the third quarter next year."

Mohit Burman of Dabur feels: "The Budget cannot escape the overhang of financial sector scams, the most infamous one being that of the trusted public mutual fund, Unit Trust of India, and the Ketan Parekh story which revealed the unholy banks-stock market nexus. The financial sector has to be restructured to avoid this and unless the IPO market revives, there is no hope for the economy livening up this year."

Government spending continues to serve as a prime mover in the crucial segments of the economy, especially in the agriculture and in the rural sectors. The effectiveness and productivity of such spending seems to be in inverse proportion to the proximity of the spending agency to the intended beneficiary community. The CII recommended that the outlay in rural irrigation projects be doubled in 2002-03 as also push up the amount allocated for poverty alleviation and rural employment. A unified food and consumer law is needed in addition to revamping the Market Committee Act and altering the agricultural pricing policy.

Yashwant Sinha expressed concern that in fiscal 2002-03 there will be a revenue shortfall with the revised estimates for revenues expected to be below the Budget estimates. He hoped to bridge the revenue gap by focusing on better compliance and elimination of tax exemptions. The focus of fiscal correction will be more directly on the revenue deficit, as indicated by the draft Fiscal Responsibility and Budget Management Bill, and not on the fiscal deficit. To revive economic growth the government is likely to incur expenditure in the infrastructure sector, and hence there may be a slippage on the fiscal deficit front.

Stating that 2001 has been a "year of tremendous challenges", the Finance Minister had claimed recently that he had often been caught in "inter corporate crossfire" where he was a target of "ideological" attacks. He plans to take a hard look at all the exemptions available under the current personal income tax and corporation tax regime. The basis of his review would be the various committee reports on taxation issues submitted to the government. He also said there would be a strict scrutiny of evasion on the personal income-tax front. The key objective of his taxation policy would continue to be two-fold — rationalisation of direct and indirect tax rates and simplification of the various tax procedures.

The plan for introducing a voluntary retirement scheme for government employees and a new pension package for them has already been finalised. The VRS will see the government slash its 34 lakh workforce by offering about 50,000 surplus employees an attractive package, paving the way for implementation of the Expenditure Reforms Commission’s roadmap for staff reduction.

Referring to the immediate problem of coping with global slowdown, Sinha has said: "We have to create a climate for investment in the manufacturing and infrastructure sectors." The withdrawal symptoms of the private sector in power and its limited participation in roads, called for public investment in these areas and steps were taken in the last two Budgets to boost the housing industry. According to Sinha, agriculture will be the top priority for the next fiscal. He was convinced that he had already crossed the first hurdle of making reforms acceptable to the people and within the party and its allies. The next hurdle was implementation. He said recently, "You can blame me for implementation delays, but not for inaction."

Critics, however, say his assurances are empty rhetoric and his talking of "second generation reforms" has become more of a mockery. Last year, he had tom-tommed reforms in the agricultural sector, hinting at a major reform of food procurement through decentralisation and removal of the anomaly in central food stocks. But coalition politics, addiction to food subsidies and poor political will to weed out the affluent from the undeserved benefits of food subsidies forced the situation to remain grim.

The continuing dip in savings ratio is another damper. Public sector savings which are negative will turn into a larger drain while corporate savings show little signs of revival. The mainstay of Indian savings is the household sector. But instead of the savings going up, they have been going down sharply in the current financial year. The FM will have to be upfront in his Budget speech regarding the nominal GDP growth figures assumed in the Budget exercise together with a clear statement about the real GDP and GDP deflator assumptions in order to make the Budget truly credible.

We expect specific changes in the IT hardware sector which will have to conform to the ITA by the year 2005. Our request has been pending for the last two years and we hope to see it come through this year. The Government of India should put in place a set of recommendations which will make the hardware sector more competitive. Anomalies in import duties too need to be corrected. At the macro level, we are hoping to see an overall decrease in the level of customs duties.

Satish Kaura, Chairman and Managing Director, Samtel Colour Ltd.

The Budget will focus on reviving the economy not just through concessions in the housing sector but also through infrastructure and urban development. The Ministry of Urban Development announced recently a meeting of all Chief Ministers, Ministers of State and Secretaries of Urban Development to discuss pre-Budget issues. Power and telecom have already been addressed. It is time urban infrastructure was given the same priority.

Vinayak Chatterjee, Chairman, Feedback Ventures.

My expectations would be to see a 5 per cent drop in pre-custom duty; nothing on personal taxation; corporate tax should be marginally reduced and there should be a re-introduction of investment allowance. The desire to see procedural and administrative simplifications across all levels is just that — a desire, I don't expect to see that happen in a hurry. Certification/clearances from government departments need to be streamlined. I would want to see systems and incentives of special economic zones to be applicable to export units

Inderdeep Singh, Managing Director, Continental Device India Ltd.