BUDGET 1999-2000
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BUDGET 98-99
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'Surchage will hit new corporate investments'

S S Bhandare

I think the Budget makes a sincere effort at tackling fiscal deficit and in particular phasing out revenue deficit over four years. One only hopes that non-plan expenditure once again does not raise its ugly head and disturb this medium-term objective.

In the short-term, there is nothing very promising from the point of view of promoting industrial resurgence. The rationalisation of excise and customs must really be put into place. Perhaps, in the initial stages there will be a lot of anomalies and irritants for some of the industries, when they will be clubbed under the specific slab of duty structure.

Looking at the total resource raising of Rs 60 billion or more from enhancing excise and customs, the overall average incidence on aggregate resources mobilised from these two taxes would be as much as six per cent.

Assuming that all this burden is passed on to the cost structure industry, there are potential pressures. Given the competition, excess capacity in industries, and the pressures of global commodity prices being low, there is no scope for Indian industry to pass on the burden in terms of raising the final product prices.

At a time when vast segment of Indian corporates is experiencing serious squeeze of profit margins, there is now an additional burden of ten per cent surcharge on corporation tax. Except for the fast moving consumer goods, pharmaceutical companies, computer software and oil refineries, the rest of the corporate world does not have the cushion to pay for this additional burden of corporate surcharge.

The composite impact of cost pressures both from indirect taxes and railway frieght hike, and the additional incidence of corporate tax, will make things increasingly difficult for the corporate sector. Therefore, the capacity to undertake new investments is likely to be under cloud.

There are no doubt significant initiatives to revive capital market but the overall sentiments will be governed by the prospects of industrial recovery and improvement in corporate profitability. In the short run, this is a grey area.

Specifically from the point of view of stimulating demand, the Budget has only a few things to offer. First, its package for the housing sector is a step in the right direction. But it would take quite sometime for the investors to be enthused given the fact that the real estate market is still under depressed mode.

Likewise, some of the sector-specific proposals are also welcome, particularly for knowledge-based industries including pharmaceuticals. But in case of textiles, mere technology renovation fund may not perform the trick. What is necessary is the integrated approach towards industrial restructuring in this area.

It is difficult to understand the sentiments of the stock market at this stage because in a crucial area about rationalisation of excise and customs, we do not have sufficient information about the slab rates applicable to different sets of industries. The immediate positive response seems to have been influenced by the promise of the FM to deal with the fiscal deficit problem. This may have been interpreted by the FIIs in a positive manner.

However, a careful evaluation of various Budget proposals would suggest that corporate profitability would be under pressure.

I think the Budget is by and large neutral with respect to inflation but marginally positive with respect to growth.

On the transport sector, the Budget would generate pressures to raise the freight rates and the passenger rates, but for the industry, since the market conditions are so intensely competitive, there is no possibility of transferring the burden on to the final product prices. On the whole it would only marginally contribute to inflation.

Last year, in fact the FM had raised the allocation for energy, telecom and transport sectors by as much as 35 per cent. But I believe no great progress was made in this area. Perhaps, the FM believes that initiatives for stimulating investment in this area will now lie outside the Budget wherein various reforms processes have to be in place. It is only after some progress takes place in this area that disbursement of funds from RIBs can take place.

I'm greatly inspired by the projections of 7 per cent+ growth for 1999-2000. However, knowing the present level of confidence in business and industry, I would like to have some elaboration about the specific positive factors people have in mind.

Even in the past, various FMs have sought to incorporate social sector in the Budgetary strategy. This year, there were two additional factors, first the influence of Amarthyanomics, and the PM's repeated statement about providing human face to reforms. Much of the initiatives can make sense only if we have efficient, competent, and uncorrupt implementation machinery. It is always the delivery system which is found wanting in trying to make an impact on human development index.

No Budget can be prepared in a political vacuum. This Budget is no exception. In the whole area of human development and social sector, one can easily identify populist measures. Even a couple of programmes are being named after the political leaders of the major coalition partners of the present government.

S S Bhandare is the chief economist of the Tata group of companies.

Budget 1999-2000

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