India's National Magazine
From the publishers of THE HINDU

Vol. 16 :: No. 06 :: Mar. 13 - 26, 1999

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UNION BUDGET '99

Beyond the sheen

The range of political reactions to the Budget sums up its features: a tentative effort to cope with a situation of gloom while striking a balance among the coalition's divergent pulls.

SUKUMAR MURALIDHARAN

SUBSTANCE, it would seem, is dispensable if the lack of it can be shrouded in rhetoric. Finance Minister Yashwant Sinha has at various times sent conflicting signals about the implicit priorities of his second budgetary exercise. Clearly, however, his principal concern has been restraining the fiscal deficit.

For an economy in recession, deficit trimming is a prescription calculated to compound all ailments. Recognising this, Yashwant Sinha has had to make some concessions to the need for a strong budgetary stimulus to economic growth. But his gestures carry more than a hint of vacuousness, since he has not really managed to commit any budgetary resources to the job. There is a promise that a supplementary demand will be placed in Parliament later when the key innovations of this Budget are fleshed out with practical details. But the fiscal crunch would seem to make this a remote probability.

The National Human Development Initiative, which Yashwant Sinha unveiled with a flourish right at the beginning of his Budget speech, remains devoid of any funding at the moment. All its various components, including the Education Guarantee Scheme, will need first to be worked out in their practical components before their pattern of funding is fixed.

The other principal component of the stimulus package is the tax concession given for housing. Again, this involves no direct budgetary outlays, only a notional sacrifice of revenue.

Of the detailed taxation proposals, the most conspicuous one is an effort to rationalise excise and customs duties by reducing the number of applicable rates and reclassifying the various commodities. Throughout his speech Yashwant Sinha provided ample assurances that he was committed to a regime of stable tax rates and would not reverse the process of simplification that had been initiated by his two immediate predecessors in office. Yet the fiscal imperatives made him renege on this assurance virtually in the next breath, when he announced a 10 per cent surcharge on customs duties with only a few commodities exempted. He followed it up with another amazing pirouette. After grandly proclaiming that he would reduce the 11 applicable rates of excise duty to a mere 3, he announced a number of surcharges on excise, effectively multiplying the number of rates to six and retaining the tax burden of most industrial sectors right where it was prior to the Budget.

NEITHER of Yashwant Sinha's two immediate predecessors was impressed. Manmohan Singh dismissed the budgetary exercise as an irrational melange, an effort to cater to constituencies of diverse interests, without any central organising principle. By ostentatiously reducing and simplifying tax rates and then reversing course, Yashwant Sinha only succeeded in sending out contradictory signals that would do little good for investor confidence, said Manmohan Singh. Within the rather garbled text of the Budget speech, the man who steered economic policy for five years in the Narasimha Rao regime could detect all the tensions of a party that was eagerly embracing the paradigm of liberalisation after having scorned it for all the years that he was at the helm. Manmohan Singh did note with not a little satisfaction, that the Bharatiya Janata Party was unable to reverse course rapidly enough to render its economic policy exertions even halfway credible.

P. Chidambaram of the Tamil Maanila Congress took on some of the more specific features of the Budget. He was particularly disdainful of the number of surcharges that the Finance Minister had levied. These would impinge seriously on investment decisions, he forecast. Investors would have to confront new uncertainties, to the detriment of industrial growth.

The inherent irony of these observations was that stock exchanges across the country were in a celebratory mood in the aftermath of the Budget. Investor sentiment was buoyed by the tax exemptions handed out for mutual funds and by the proposal to introduce a new law to deal with mergers and acquisitions. In theory, a buoyant stock market promotes investment decisions by reducing the cost of capital for prospective investors. The initial response of the markets pointed clearly to the opposite of Chidambaram's prognosis, though the durability of this reaction could still be open to some doubt.

THIS was an issue that the Communist Party of India (Marxist) alone among all political parties, squarely addressed. Reducing the cost of capital did not necessarily mean an increase in investment if the demand stimulus was weak, said the party's Polit Bureau in a detailed statement. Rather, the incentives given to the stock markets could translate itself into a feast of financial speculation, pumping up a stock market bubble that would have minimal implications for actual productive activity.

S. MAHINSHA
Former Finance Minister P. Chidambaram.

The CPI(M) rejected the philosophical thrust of the Budget as being contrary to the requirements of a recession scarred economy. The fiscal correction that the Budget boasted of was no more than a statistical sleight of hand, said the Polit Bureau, and in curtailing capital expenditure in real terms it threatened a further accentuation of the depressed economic conditions.

Various observers pointed to the rather unreasonable projections of tax revenue in the Budget - an increase of over 20 per cent in 1999-2000 in relation to the revised estimates for the current year. From post-Budget explanations by Finance Ministry officials it emerged that economic growth in nominal terms is expected to be no more than 13 per cent in the coming year. This discrepancy, in the CPI(M)'s estimation, pointed to a certain lack of rigour and seriousness in the Budget estimates - indeed to its proclivity to evade crucial decisions in favour of easier options such as raising diesel prices.

Parties of the Left took general exception to the decision to step up the public sector disinvestment programme. As against a budgetary estimate of Rs.5,000 crores for the current year, the actual outcome from disinvestment is slated to be Rs.9,000 crores - much of it through the farcical exchange of shares between cash-rich public sector units, which will in turn seriously impair their investment plans. And if this were not bad enough, the budgetary projection for 1999-2000 is that disinvestment will yield no less than Rs.10,000 crores for the Central Government's revenues.

The Central Secretariat of the Communist Party of India denounced the Budget for its strong commitment to "privatisation and other neo-liberal economic policies". It also found the skewed emphasis of the Budget particularly objectionable - all the concessions had been reserved for the stock markets and foreign investors, while the burden of adjustment was being placed upon the average tax-payer.

SANDEEP SAXENA
Former Finance Minister Manmohan Singh.

WITH the exception of the BJP-affiliated Bharatiya Mazdoor Sangh, all central trade unions organisations reacted sharply to the Budget proposals. The All India Trade Union Congress pointed out that central trade union organisations had brought up a number of issues of concern before the Finance Minister during pre-Budget confabulations. These included raising the rate of interest on provident funds and pension funds, preserving the insurance sector as a public sector monopoly, enacting comprehensive measures to check the menace of dumping, introducing legislative measures to protect the terms of employment of agricultural labourers and providing workers in unorganised sector with some social security measure, and raising the income-tax exemption limit to Rs.1 lakh. None of these concerns, the AITUC observed, had been addressed in Yashwant Sinha's Budget.

The Centre of Indian Trade Unions (CITU) also took umbrage at the failure to increase the income tax exemption limit. It further pointed out that the allocation of larger funds for voluntary retirement schemes was only meant to "reduce further the manpower employed in public sector undertakings". On top of this, there was the conspicuous absence of any intention to address the rampant problem of industrial sickness, which was claiming a massive toll in public resources and worker morale.

The BMS shared the grievance of the other central trade union organisations over the failure to address the issue of the income tax limit. But it welcomed the allocation of Rs.1,735 crores for payment of wages for workers in sick units, though this is no more than a temporary palliative for a deep-seated structural malady. It found the emphasis on rural industry, handlooms and textiles to be most commendable, though the sums earmarked are negligible.

WITHIN the ruling coalition, the reaction was almost uniformly positive. The Trinamul Congress, which has in recent times shown signs of restiveness at the sense of policy drift at the Centre, pronounced its qualified approval, while the Shiromani Akali Dal was only slightly ruffled by the diesel price increase. The Shiv Sena thought that in the circumstances, the Budget could have been considerably worse, though it was bothered by the failure to address the special needs of Mumbai.

In the final analysis, the range of political reactions summed up the unique features of this Budget - a tentative and rather unimaginative effort to cope with a situation of endemic economic gloom, while striking a balance among the diverse and divergent sectional pulls that the character of the ruling coalition entails. The stock market, a creature of pronouncedly fickle moods, responded with unmistakable warmth. That remains, as of now, the only signal that the Finance Minister can take heart from. It may well prove all too ephemeral.