BUDGET 1999-2000
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BUDGET 98-99
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Can growth rates pick up?

Better than last year's, still a gamble

The Union Budget for 1999-2000 has implicitly assumed a real rate of growth of GDP of around 6.5 per cent against 5.8 per cent during the current financial year (new CSO series). The pick-up of the real growth rate of the economy this year has largely been on account of a revival of the agriculture and service sectors.

The index of agricultural production of 46 crops is slated to rise by almost four per cent in 1998-99 against a fall of six per cent in the previous year. It is not clear if such high rate of growth can be sustained in 1999-2000 as well. A source of concern is, while output of foodgrains is expected to rise by 1.5 per cent in 1998-99 against a drop of 3.5 per cent in the previous year, total output of foodgrains in 1998-99 would be a good four million tonnes lower than the record output of nearly 200 million tonnes achieved in 1996-97.

The tough part of the problem lies in reviving the rates of growth of the manufacturing sector as well as exports. In US dollar terms, exports actually came down by almost three per cent in April-December 1998 for the fist time in more than seven years. The government may allow the Reserve Bank of India to gradually devalue the rupee in the coming months.

This would help revive exports to an extent. Otherwise, the government hopes there would not be another financial meltdown in south-east Asia and that the economies of Russia and Latin America would improve.

The index of industrial production rose by only 3.5 per cent during the first half of the current fiscal year against a growth of 6.6 per cent in the corresponding period of 1997-98. Of particular concern is the slowdown in the infrastructure sector. The growth of GDP from manufacturing has come down sharply in the three years from 1995-96: from 15 per cent to 7.7 per cent and 6.8 per cent.

This Budget has offered tax incentives to mutual funds and bailed out the Unit Trust of India in keeping with the recommendations of the Deepak Parekh Committee which was instituted after there was a crisis of confidence in the US-64 (Unit Scheme of 1964) in October. The government hopes these steps will help revive the country's capital markets and restore the confidence of small investors.

Even if this happens, it may not be sufficient to revive the manufacturing sector. Corporates are currently having to confront the twin constraints of low demand and low investment. The benefits for the housing sector contained in the Budget may contribute to higher demand for steel and cement, two industries which are currently in the grip of recessionary tendencies.

It was hoped that the cess on diesel would be entirely earmarked for the expressways scheme announced by Prime Minister Atal Bihari Vajpayee in October -- the scheme to link Kashmir with Kanyakumari and Kutch with Cachar by eight-lane highways. However, the extra funds that would be garnered by increasing diesel prices would meet only a small fraction of the costs of the Prime Minister's grandiose scheme.

The short point is that while the government hopes that the infrastructure --power, roads, ports and telecommunications -- will improve, there is no firm indication that this will actually happen. Thus, the revival of the industrial sector, which also depends on additional farm incomes leading to higher consumption, is not very certain. Thankfully, the finance minister is no longer talking of kickstarting the economy.

One indication why it would be better to err on the side of caution as far as industrial growth is concerned can be found in the figures relating to excise duty collections. Total excise revenue is expected to rise from Rs 532 billion in 1998-99 (revised estimate) to Rs 591 billion in 1999-2000 (Budget estimate).

The difference between the two figures is around 11 per cent or Rs 59 billion. But the additional excise duty expected to be collected through diesel sales alone works out to Rs 46 billion. In other words, the expected rise in excise collections (excluding those from diesel) is only Rs 13 billion which means the government too does not expect industrial production to rise very much.

The Second Wave of Reforms

Privatisation, for one. Cutting unproductive government expenditure, for another. Capital account convertibility as well. Starting with the last, what is clear is that he government would prefer to move rather cautiously to make the rupee fully convertible on the capital account given the recent southeast Asian experience.

As the official committee headed by S S Tarapore, former deputy governor of the RBI, had pointed out, the target of full capital account convertibility is achievable only if inflation rates come down and remain below the 4-5 per cent per year mark for a while. This has to be accompanied by public sector banks substantially reducing their non-performing assets from 15-16 per cent of the bank's total assets at present.

A major component of the "second wave" of reforms has to be real disinvestment of shares of PSUs. The government intends raising Rs 80 billion from the proceeds of disinvestment during the current year against a Budget target of Rs 50 billion. The way in which this is being sought to be achieved has raised a number of doubts.

By insisting that two of the country's largest and most profitable public sector undertakings, Indian Oil Corporation and Oil & Natural Gas Corporation go in for "cross-holding" of shares, the government intends killing two birds with one stone. It hopes to bring down the Budget deficit by receiving funds from both the "disinvesting" PSUs while, at the same time, claiming that the exercise is being done to ensure greater "synergy" and "vertifical integration" between the two corporations to enable them to become internationally competitive.

Sinha's predecessors P Chidambaram and Manmohan Singh have both flayed this move on the ground that what is being done is neither disinvestment nor vertical integration. If the government wanted cross-holding of shares between IOC and ONGC, it should have asked both companies to issue fresh shares instead of milking both of them.

Thus, the critics argue that instead of killing two birds with a single stone, the government may well end up killing the goose that lays golden eggs by impairing the long-term investment potential of nav ratnas like IOC and ONGC. Sinha has responded to this criticism by claiming that his predecessors are cribbing because they could not come up with such a "good idea" to generate resources.

There are a couple of points to note in this context. First, the problem of reforming the working of the public sector has been bypassed since the government has no clear idea about what needs to be done for terminally ill and chronically sick PSUs.

Second, genuine disinvestment means sale of shares to members of the public and genuine privatisation means the controlling interest of a public sector corporation (or 51 per cent of the shares) has to be transferred to private hands. None of all this is likely to happen in a hurry, although Sinha insists that he is in favour of strategic sales and outright transfer of ownership of PSUs. Time alone will tell whether the government will be able to muster the political courage to take such difficult decisions.

Part III -- Can the government be downsized?

Courtesy: Sunday magazine

Budget 1999-2000

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