BUDGET 1999-2000
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BUDGET 98-99
BUDGET 97-98
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'When Opposition is critical and analysts are happy, it means Budget is good'

S S Bhalla

I think it is a very good Budget and there are implicit promises that next year will be even better. It's a visionary Budget in that it has a clear idea where the fiscal and indirectly monetary and interest rate policy will be headed over the next several years.

Regarding the internal debt trap, the key point is that the interest payments today account for 80 to 90 per cent of the entire fiscal deficit. If interest rates were brought down -- and they can be because of the good fiscal and inflationary situation today -- by 200 basis points, then this itself will reduce the fiscal deficit by another one per cent or so.

So we will be close to the three per cent level that the European common market had recommended for its members. This also of course helps solve the internal debt problem by making future debt less expensive.

There are two things happening with the fiscal deficit, independent of any new policies. Firstly, that the GDP has been estimated to be 10 per cent larger in each of the last five years. Therefore, automatically, your fiscal deficit as a percentage of GDP goes down by 10 per cent, which is why last year's 98-99 fiscal deficit of 6.5 per cent of GDP appears as 5.8 per cent.

Secondly, small-scale savings have been included as an expenditure item but not a revenue item in the past. From this year onwards, the Budget document eliminates accounting this discrepancy. This subtracts another 0.5 per cent of GDP from the fiscal deficit. Thus, 5.8 per cent this year becomes 5.3 per cent. So the reduction for next year is only 0.9 per cent. And in my view, given the policies announced of tax reforms and some surcharges plus control on expenditures, this is very achievable.

Is this a closed economy Budget? Yes and no. But more no. There is an element of a closed economy budget which has to do with the still high level of customs duties. But, the peak rate has been reduced and some of the past surcharges have been eliminated. Further, there has been a reform of the number of slabs in the customs tax structure. This, in addition to expected growth in the economy, may set the stage for a tax reduction in custom duties next year which will then be more in the direction of an open economy.

Some people are not very confident about the finance minister's medium-term objective of reducing fisical deficit and phasing out revenue deficit. They feel the FM has missed out an opportunity of initiating some major reform in the area of capital account convertibility. They also feel concerned about the interest rate scenario in the short run. Well, on capital account convertibility, the stage I believe is being set for major reforms within a year or so.

This is related to interest rates. Regarding interest rates, my belief is that unless interest rates decline significantly (200 basis points in the next six months) much of the tax reforms and the economy will be for nought.

But, my own forecast is that, interest rates will decline and that we will move towards a seven per cent plus GDP growth in 1999-2000. Such growth and an improved fiscal situation will help the rupee strengthen and in order to fight this strengthening one can expect reforms in capital account convertibility.

There is a talk whether Budget 1999-2000 is win-win or lose-lose or win-lose. I feel it is a win-win Budget in that it is good for growth and inflation. I think the best indication that it is a good Budget and a win-win Budget is that the Congress party politicians and other opposition parties say it is a bad Budget while most analysts say it is a a good Budget.

The reason there will be a low inflation is because of the rationalisation of the tax excise duty structure which will reduce transaction costs, corruption and increase competition because lobbies will not be able to unduly benefit themselves by either the purchase of politicians or bureaucrats.

A very good part of the Budget is that it has made a departure from the past in that it is not trying to placate particular interest groups and therefore making a potpourri of the Budget. Instead, the Budget seeks to provide a framework for higher growth mostly propelled by the private sector. Therefore, the fact that there are no major initiatives for agriculture or infrastructure should be welcomed rather than criticised.

People should look out for whether the interest rates decline or not. If the rates decline, which I expect, then it is a very good Budget. If not, then it is back to the drawing board in search of higher growth.

Dr S S Bhalla is economist and director, Oxus Fund Management

Budget 1999-2000

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