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The Rediff Budget Jury/Prof R Vaidyanathan

'Budget attempts to please govt employees at all costs. Are they holy cows?'

BUDGET 2000

The task of analysing this Budget is simple, since the Budget is a simple(ton) one. :-)

The Budget has proved that it is not a tool for setting economic agenda of our country. It has also shown what many know -- that the emperor is bereft of ideas, not just clothes.

It shows that the bogus slogans of the Fifties have got into the skins of all our politicians so much that they do not want to be factual.

What is the meaning of retaining 33 per cent holding in public sector banks and maintaining them as government companies? In theory, holding shares in a company entitles one to the right to vote to elect a board to run its affairs. But if you hold a stake in big companies and just get your dividend cheque (if the company sends it) and maybe the abridged annual report, such an investment does not make much sense, does it? But, in the context of the public sector undertakings, the government seems to think it does!.

The attempt is to help 11.13 million government employees at all costs.

Their Employee Provident Fund gets 11 per cent tax-free interest, which is 17 per cent risk-free tax-free interest actually, while a self-employed person pays 34.5 per cent of his / her bank interest of 8 per cent. Pathetic!

Some 166 million self-employed persons in this country do not have leave travel concession, medical benefit, provident fund, pension, gratuity and access to corruption. Are the 11 million government employees such holy cows?

In 1952, it was said we were at the crossroads. In 1971, it was said we were at a junction. In 1992, it was again crossroads. Now what? I wonder.

This way, the crossroads will get so choked that even the slim Luna moped of the yore that is our economy, will find it difficult to forge ahead.

What would be the Budget impact? Initially, we will see a slide in stockmarkets for three to four weeks since the pre-Budget hype-led rally and the subsequent Budget-day bloodbath have affected the sentiment. Infotech companies -- they are the market's current darlings -- from now on have to pay tax on profits from exports. That is, in popular perception, bad news. After a month or so, the markets will see sense and stabilise.

Studies have shown that the boom in IT industry has nothing to do with the Indian economy. It has only to do with US economy since all boom is on customised software exports by contract firms in India.

Our government wants to fill up potholed Bangalore roads by taking 20 per cent of the profit (and on a sliding scale) of these firms whose growth is only dependent on the US economy.

The next generation reform that the government talks about should be the reform to be undertaken hopefully by the next generation youngsters who are preferably born after the Sixties, unencumbered by the weight of the socialistic pattern of society.

Much as been said about the cut in fertiliser subsidy. It is not a question of price. Most of the fertiliser companies are inefficient and the cost-retention price is passed on to (mostly indirect) tax-payers.

The optimal usage does not take place because of differential pricing of different fertiliser inputs. Actually, we are sustaining a huge white elephant in the name of retention pricing.

I've a piece of free advice for investors. If you have invested in the public sector, banks or the Steel Authority of India Limited, then read Sinha's lips. If you have invested in gold, then read what central bankers in London and Amsterdam are going to do. If you have invested in the Bihar State Electricity Board, then perform the final rites on the banks of Benares (no protest for this against you! ;-). It depends on where your investments are. If they are in IT, then look at US buyers from these software contractors.

Nowhere in the world will you get 11 per cent tax-free risk-free (at the highest tax rate it is 17 per cent) interest on EPF, except perhaps in Rwanda (provided you borrow from the Tutsis!)...;-) If the government's bureaucrats earn 17 per cent tax-free risk-free interest even as the small shopkeeper pays 6 per cent per month, there is no "undesirability" in the idea that the government has no business being in businesses like banking. If anything, this unfounded social security to corrupt retired bureaucrats is undesirable!

R Vaidyanathan is Professor of Finance, Indian Institute of Management, Bangalore.

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