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Business Commentary/ R C Murthy

Time to 'bite the bullet' nears for Sinha

Will Finance Minister Yashwant Sinha really "bite the bullet" on February 29? Everyone who matters has said what Sinha should do but in generalities: tighten the belt, raise resources, cut the fiscal deficit and indulge in massive divestment to reduce internal debt.

Several others have said that Sinha has a unique balancing act to perform. But that is what is said every year pre-budget time. In a sense, it has become a cliche.

This is not a crisis situation a la 1991. Yet, an atmosphere is sought to be created of something cataclysmic occuring. It could be part of an official strategy to make the public at large discount in advance budgetary package that may contain some unpalatable measures.

Economic pundits and former finance ministers have given their recipes. It's a question of pick and choose the right package, a mix that is politically feasible and perceived to be credible. But none attempted to put forth a package best suited to this occasion.

Even experienced persons in the driver's seat at the Ministry of Finance at some point of time in the past, like S.Venkitaramanan, former bureaucrat and RBI governor, have confined to generalities.

The biggest problem of the present government is credibility, having not met the targets set in the budget a year ago. Sinha may have alibis of Kargil and Orissa cyclone.

But the budget has gone haywire not due to these two factors alone but also due to ballooning central staff salary bill, high cost of combating the rising insurgency in north-east and north-west, indications of which were available at the time of budget making in February 1999 and, above all, lack of earnestness to implement the decisions spelled out in the budget itself -- cutting non-productive expenditure.

There is thus an urgent need to translate into action fully decisions already announced, and narrow the credibility gap.

The budget for new fiscal can be a watershed. The National Democratic Alliance was swept to power with a fair chance of completing its five-year term.

At stake for the BJP, the dominant NDA partner, is to deliver the goods and fulfil the promises made in the NDA manifesto. The attack has to be on several fronts -- fiscal deficit reduction, cut in the public debt and additional resources mobilisation.

These are the remedies available. The question is their right dosage so that the economy recovers fully within an acceptable time-frame with least side-effects.

The current budget, presented by Sinha in February last year, already spelled out a medium-term plan to eliminate the revenue deficit and cut the fiscal deficit by two percentage points of GDP by 2003.

The fiscal deficit would probably go up by two percentage points this year instead of 0.6 per cent decline projected.

Seen in that light, how much the market borrowings are to be cut next fiscal? Will the subsidies be eliminated in two years? How much cash is to be mobilised through PSU divestment as also its apportionment for fiscal deficit reduction and internal public debt cut? Also, the extent of revenues to be mobilised and expenditure cut are to be decided.

All these have to be achieved without upsetting the applecart of prices. Political considerations circumscribe the package formulation. Look at the differences within the NDA.

A pre-budget hike of LPG and kerosene prices was slated to slash the subsidy, as part of a grand plan to eliminate the annual Rs l4 billion burden in two years.

But the decision was postponed till mid-March. Obviously, a sharp hike in LPG price at this juncture is not acceptable to the Chandrababu Naidu-led Telugu Desam Party as it sanctioned 100,000 LPG connections in Andhra Pradesh.

Probably, the state chief minister wants to explain the raison d'etre for the proposed hike first.

Whether Sinha will bite the bullet is to be seen. While the administration dithers on this issue, the parties in power feel other subsidies are explosive. Fertiliser subsidy is a sacred cow and can't be touched. The farmer lobby would be up in arms against the BJP if it tinkers with this subsidy.

Apparently, there is some room to manoeuvre in additional revenue mobilisation. A growth-oriented budget, Sinha recognises, should boost revenues. Sinha is projecting a growth higher than this year's 6 per cent.

But there are imponderables here too. The industrial sector is just turning around after a bout of recession. The recovery is rather prolonged in absence of adequate stimulus after the budget presentation in February last year. Like the deferred mid-year interest rate cut.

What should Sinha do in the circumstances?

• The new budget should do everything to nurse industry back to full bloom so that the economy is on an accelerated growth path. Achieving, say, 7 per cent growth next year would lead to buoyant revenues in direct and indirect taxes.
• With the increasing share of services sector in the GDP, there is a need to have a fresh look at the tax incidence on it. More areas need to be covered and tax rates readjusted. For instance, an enhanced tax on courier services offers scope for jacking up of postal rates, which are heavily subsidised at present.
• The finance minister should use the agreement with the World Trade Organisation regarding phasing out quantitative restrictions on imports to replace with peak tariff the ban on imports of 754 items in April. The QR phase-out will be completed in April 2001 when the last batch of 750 items are freed from QR. This is a new revenue source.
• Instead of agricultural income-tax, Sinha should formulate a scheme offering incentives matching the revenue mobilised from agriculture by state agencies/local panchayats. Cash is cash. Whether it goes to the state exchequer or central kitty, the overall pool would stand augmented.In fact, it will help the states' budgetary deficits, which together with the Centre's, exceeds 10 per cent of GDP.
• Cutting expenditure is the most difficult exercise. Sinha will have to tread rather carefully. Instead of indulging in platitudes, he should aim at holding it at this year's level. That itself is no mean achievement.

R C Murthy

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