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India Inc becomes more competitive

BS Corporate Bureau

The Union Budget for 2001-02 presents a coherent and integrated strategy for taking the economy to a higher growth trajectory.

As part of his long-term strategy, Yashwant Sinha has initiated second generation reforms.

A beginning has been made on labour law reform; the repeal of the Sick Industrial Companies Act will help restructuring; the size of the government is being pruned; and there have been important announcements on subsidy restructuring for food and fertilisers.

Steps have been taken to lower the cost of capital for industry by lowering administered interest rates. Yet another promising beginning is in pension reform, and new recruits into government service will face a new pension system from October 1 this year.

This year's Economic Survey had pointed out that the reform process needed to be re-started to maintain the the growth rate. And the Budget has done just that.

The Survey also drew attention to the spurt in growth that followed the first wave of reforms, thus hinting that the second wave would have the same effect.

This should attract foreign portfolio investment, which is facilitated by the increase of 49 per cent of a company's capital in the FII limit on investment .

The lowering of dividend tax, reduction in administered interest rates, removal of income-tax surcharge, and waiver of capital gains tax if investments are made in the primary markets, will also boost the equity markets, enabling industry to raise capital for investment.

The Budget will help the Indian corporate sector to increase its competitiveness.

The decrease in dividend tax and removal of surcharge are a boon to corporates. As is the lower interest rate regime.

Vital sectors that serve as engines of growth, such as automobiles, have been given a boost.

Restrictions on investing and acquiring units abroad have been further relaxed. Sectors, for instance food processing, are now more inviting to investors. While the amendments to the Contract Labour Act will spur outsourcing.

Toys, leather goods and shoes are no longer reserved for the small scale sector, enabling competition in world markets. Simultaneously, the FM has moved to offer protection in agriculture, and in areas where local industries are under threat, such as the import of second-hand cars.

Apart from lower taxes, there are other immediate benefits too.

The hike in central outlay for power utilities will help the capital goods sector, while the National Highway Development Programme will provide a boost to the cement industry.

Lower interest rates should help spur consumption demand in automobiles, consumer durables and housing.

Also, borrowing requirements for the next year are budgeted to be lower in real terms, implying that lower interest rates are here to stay.

Only time will tell if the Budget will be able to deliver.

So far, Sinha has been successful in keeping the fiscal deficit on target this year. This is no mean achievement given the industry slowdown.

For the next year, Sinha has budgeted a rise in revenue receipts by 12.4 per cent, an attainable target considering the fact that they rose by 13.5 per cent this year.

Tax revenues are projected to rise by 12.9 per cent, compared to a rise of 12.5 per cent in 2000-01 (Revised estimates over actuals).

The real challenge lies in containing expenditure.

Total expenditure is projected to rise by 11.8 per cent, compared to 12.6 per cent this year. Revenue expenditure is budgeted to rise by only 9.5 per cent while capital expenditure is expected to go up 24.4 per cent, mainly due to defence.

Sinha's credibility has improved tremendously due to his ability to keep revenue expenditure at the budgeted level this fiscal year, and he should be able to deliver in the following months.

Source: Business Standard

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