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Business Commentary/ Jay Dubashi

Sinha's 3-F formula

This is a 50:50 budget. Half the people believe that it is a good budget, the other half don't. The problem is in trying to make out which half.

It is this difference in opinion that is responsible for the post-Budget boom. The surge has taken Bombay Sensex from 3200 to over 3700, but punters are not sure whether that's the end of the road and the boom will soon be petering away. Stock markets are funny things: they go down as fast as they shoot up. This one may not last longer than March-end.

Why do I say this? Because, I do not find anything in the Budget to get the economy moving. For the last three years, almost everything connected with the economy has been on a downslide: industrial production, investment, both Indian and foreign, exports. The finance minister has blamed the upheaval in East Asian markets for the fall. But last year, in his Budget speech, he had pointedly said that the turmoil in the east would have no effect on India. Why he is playing a different tune now?

Because, in his heart of hearts, he believes that the economy has gone out of control. His officials have cooked up figures to show that the fiscal deficit would come down to 4.4 per cent next year. If they can believe that, they can believe anything.

This main reason, and a crucial one, for the downturn in the economy since 1996, is that the Centre does not have the resources to re-start the economy. The government's own investments have come down. In fact, they have been steadily coming down from 7 pc of the GDP ten years ago to 3.8 per cent now. The government spends more and more on itself, and very little on everybody else.

During Manmohan Singh's days, the slack in government investment was taken up by foreign investors as also by Indian businessmen. Foreign direct investment rose from almost nothing in 1991 to 3 billion dollars two years ago. Indian corporates also started investing more because of growing demand from the new middle class that had been starved of goodies all these years, and was raring to go.

That pent-up demand gave a boost to investment, and with it, the economy. But the demand is now a spent force. With the downturn in business and also because of growing competition from foreign imports, Indian firms are not sure of themselves and have become cautious about further investments.

Foreign investors are also not so sure about the future. The political scene is messy, and BJP government's performance has been none too happy. Last year, foreign direct investment came down by 38 per cent on the year before. This is a substantial drop and made a big hole in the economy.

Yashwant Sinha's second Budget is tailored to meet the doubts of foreign investors. It is, in fact, an anti-Swadeshi budget, a word he does not even mention in his speech. He does not mention foreign investment either, but everything in the budget is tailored to their requirements -- what I call the 3-F formula.

The three Fs are: fiscal stabilisation, foreign investment and market-friendly reforms. Foreigners do not like huge fiscal deficits, which they think raise interest rates. They want market-oriented reforms, because they do not want the government, about which they are none too sure, to decide the fate of their business. Yashwant Sinha gives them all. He says he has brought down the deficit from 5 to 4 per cent. He is going to push ahead with market reforms and he is going to throw large chunks of the economy to foreigners.

Within hours of the budget, it was announced that the insurance bill would be cleared soon. That foreign banks would be allowed to have stake in Indian banks. That banks will also be allowed into insurance business. That foreigners will be allowed 100 per cent investment in housing, which has come in for special focus in the budget.

Foreign investors have taken the bait and pushed the Sensex skyward. The question is how long the boom will last. Booms dependent on foreign investors do not last very long. Remember what happened to Manmohan Singh and Chidambaram. Their parties were routed in the polls, the Congress strength in Parliament being cut down to half. Is the BJP going to meet the same fate?

Jay Dubashi

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