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Sanctions force reworking of Union budget

Rajesh Ramachandran in New Delhi

Under the threat of economic sanctions, the finance ministry is reworking the Union Budget.

"The impact of the sanctions is still not clear. The US is obviously exaggerating the amount of aid lost. But the biggest cause of worry is the value of the rupee," Dr S L Rao, former director general of the National Council for Applied Economic Research told Rediff On The NeT.

According to Dr Rao, a hike in surcharges is on the cards. The government now has to deal with the loss in capital since external borrowings are ruled out. The cost of imports will also have reworked, he said.

To ease the pressure on the Indian private sector, the government will have to lower domestic interest rates too.

Another short term measure to compensate for a falling rupee would be to raise the customs duty on imports. But with all these measures, Indian industry still has a tough time ahead, particularly since it still reels under a very low growth rate.

If the rupee value falls further, then imports, including that of petroleum products, will become more expensive, sending the country into an inflationary spiral, a factor the Budget will have to allow for.

Sources close to Finance Minister Yashwant Sinha indicate that one measure the ministry is trying to avoid is to raise taxes. But it is uncertain if the Budget will be as populist as the ruling Bharatiya Janata Party would prefer it to be.

But there is also optimism that India is in a better position to negotiate conditions for signing the Comprehensive Test Ban Treaty. Ministry officials feel that by the time the Budget is presented the US will ease up and reduce sanctions.

The best alternative for Sinha, they argue, is to woo multinationals by clearing their projects in time. This would mean more MNCs -- happier ones -- would lobby hard to get the sanctions raised. And if that doesn't work, the government hopes to make do with help from the domestic private sector, covertly discouraging multinationals.

But for the moment, the BJP are positive that US giants like Boeing and Cogentrix, which have been hit badly, will help its cause.

Meanwhile, BJP economists feel this is the best opportunity to implement its plan to mobilise monetary support from non-resident Indians.

"Interest rates in the West are very low, around four per cent. The government can always give eight per cent interest for NRI savings," a BJP leader said, adding that this would be the best way out of the current financial morass.