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The Rediff Budget Special/R C Murthy

Sinha delivers on his promise to 'bite the bullet'

First impressions: Corporate bottomlines may take a beating

Finance Minister Yashwant Sinha has finally bitten the bullet.

Exports are no longer a sacred cow. The 2000-01 Budget proposes a tax on export profits.

BUDGET 2000

So too the farmer, who has to shell out more for the urea he uses. The tax-payer is not spared: surcharge on income-tax is up to 15 per cent from ten per cent now.

The stockmarket is upset. The red rag for it is the enhanced income-tax surcharge. Also not to its liking is the 7.5 per cent tax on the information technology sector. Marketmen had expected not more than five per cent tax.

The bottomlines of the corporate sector, especially those producing consumer durables, would be affected. They will not be able to pass on the incidence of higher excise after the single 16 per cent levy, with special duties attached, comes into force.

The sharp fall in share values following the budget speech is partly due to the traders' anxiety to cut losses as Tuesday happens to be the last trading day of the current settlement at the National Stock Exchange.

As the market digests the Budget, the reaction over the next few days would be matured and a rally cannot be ruled out. In a sense, the market has discounted most Budget proposals.

One had expected some burden on the tax payer, Sinha having deferred Kargil tax. The tax burden on the IT industry is phased over five years with rising incidence. Only one- fifth of its export profits will be taxed in the new fiscal.

The only surprise has been customs tariff, whose changes have become a drain on the exchequer rather than a revenue earner. But there appears to be some method in the madness.

Economic growth in the new fiscal is to be propelled largely by export-oriented industries. Imported components that go into locally- finished products have to be priced reasonably.

The Vajpayee government will face music from other NDA constituents for the fertiliser subsidy cut. Om Prakash Chautala of Haryana and Chandrababu Naidu of Andhra Pradesh will certainly make noise.

But the timing is right. Haryana assembly and Andhra panchayat elections are over. So no political fallout is expected.

It appears Prime Minister Vajpayee is wiser than before. This is reflected in the tenor of Sinha's Budget speech. No platitudes and no references to what he could not do so far. Like the failure at expenditure control. No word of that in the speech.

Probably, he wants to work silently and achieve something rather than shouting from the rooftop and incur the wrath of central government bureaucrats.

Analysis: Bad budget for FMCG sector?

Once bitten, twice shy. Having failed to fulfil targets under major heads, like PSU divestment, downsizing the administration, revenue mobilisation, the Vajpayee government started off the new millennium on what seems a sombre note.

No platitudes seizing the new millennium platform and no setting tall and unachievable targets.

But the proposals in Budget 2000-01 have fallen between two stools. The understanding or misunderstanding of the proposals has led to all-round dissatisfaction, marked by a 500-point plunge of the Bombay Stock Exchange 30-share Sensex. The communication gap may prove costly.

Sinha is attempting to accomplish what is feasible. Straight-forward direct taxes, personal (hike in income-tax surcharge to 15 per cent from 10 per cent) and corporate (bringing export profits to tax ambit over five years) to finance the 28 per cent rise in allocations for defence, besides outlay on agriculture under various heads.

Also proposed are cuts in subsidies for fertiliser and food to narrow the fiscal deficit to 5.1 per cent next year from revised 5.6 per cent for the year to March next.

A complex portion is to tap central excise, under the pretext of overhauling the indirect tax system, not to raise additional cash but to cross-subsidise the Rs 14 billion loss under customs. Whether or not the exercise will end up exactly the way Sinha envisages is to be seen. It's a gamble.

The hope is that in the process of global integration, industry will use more of imports to make finished products for the local market and export.

Two birds in one shot -- reduced imports conform to the agreement with the WTO on phasing out quantitative restrictions or QRs and use relatively cheap imports for industrial resurgence. Is Indian industry that resilient?

The budget for the new fiscal is silent on cutting the expenditure. At the end of the year, the government can't be rapped as there is no mention of it at all. Sinha need not hold the can.

The official thinking could be, why awake the sleeping dogs now? They will make the government's life miserable from now on -- well before the administration's downsizing starts.

Also, the budget takes credit for PSU divestment just Rs l0 billion (against Rs 100 billion in last Budget but never reached) and the entire cash is earmarked for reduction of internal debt, high cost debt of course.

I had argued earlier for Vajpayee and Sinha to bridge the credibility gap arising out of whopping shortfalls in achieving the budgetary targets.

What the duo has done (Vajpayee and his Cabinet approved the Budget speech on February 25) is to set no target at all or to fix unconscionably low target. For instance, PSU divestment.

Still, if the duo does reasonably well over the year on these two fronts and achieve a fiscal deficit far lower than the targeted 5.l per cent of GDP, the administration's credibility rating will certainly go up.

In fact, one does not have to wait for 52 weeks. The foreign institutional investors follow every official step. They appreciate better than the speculators, who dragged the BSE Sensex dramatically on the Budget evening.

What the top duo has forgotten is what is called sentiment. The markets ride on sentiment. Will the FIIs respect it? Or will they plough a lone furrow based on their perception of the administration's actions?

There is no love lost between the two groups. In fact, a ding-dong battle goes on between local speculators and FIIs. The former make hectic purchases just before the perceived entry of FIIs and try to saddle them with high P/E stocks.

The fears of tycoons seem to be real. Will the enhanced IT surcharge dampen effective demand and smother nascent industrial revival? Will there be a liquidity shortage as the government mops up resources through taxation and reins silently public expenditure?

Achieving a lower fiscal deficit of 5.l per cent is imperitive. Also important is industrial revival. There is a lurking fear that the Budget will hurt fast moving consumer goods industries.

The government would have to be proactive. The general provident fund interest rate cut by one percentage point to 11 per cent should be a signal to the Reserve Bank of the course interest rates should take.

Not only the interest rates be cut, the Reserve Bank will have to ensure that the loans made are cheaper than now and enough liquidity is available.

Tough times are ahead for the government and it should take the public into confidence on every aspect so that the communication gap is eliminated.

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