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S. Venkitaramanan

MR Yashwant Sinha's latest budget has lived up to the expectation of not being an exciting effort. The best that can be said of the Budget is that the Finance Minister has tried to do his utmost given the economic slowdown and higher expenditure demands arising from the geo-political situation. The reformer in Mr Sinha has, however, continued to dominate the Budget. He has made serious efforts to liberalise the economy and to continue the reforms process. The Budget does not, however, incorporate any substantial effort to revive the depressed economy.

The budget rightly focusses on agriculture. In addition, the stated strategy focusses on public and private investments in infrastructure, deepening structural reform to regenerate economic growth and the provision of social security to the poor. Tax reforms and continued fiscal adjustments at the Central and State levels dominate.

The fiscal deficit in the revised estimates at 5.7 per cent of the GDP is well above the targeted 4.7 per cent. The revenue deficit at 4 per cent is higher than the target of 3.2 per cent. Fiscal marksmanship has had a set back. The Finance Minister's estimate of a fiscal deficit of 5.3 per cent of GDP for 2002-03 may, in fact, turn out to be optimistic.

The Government has brought about a number of changes with regard to regulations of agricultural production and marketing. To what extent the State Governments will carry out the process of providing freedom to farmers remains to be seen despite the incentives provided by the Finance Minister to the States.

Mr Yashwant Sinha has to be congratulated for focussing on agricultural credit. The Kisan Credit Card Scheme has been a resounding success. An additional 63 lakh KCCs were issued up to December 31, 2001, taking the total to 2.07 crore.

It is hoped that the KCCs will liberate rural farmers from the stranglehold of moneylenders.

Another welcome initiative is the setting up of a separate corporation for agricultural insurance to be promoted by the existing public sector general insurance companies. A proper actuarial regime needs to be established so that it is not a loss-making enterprise.

The Budget has emphasised rural employment, especially through the expansion of the Sampoorna Grameen Rozgar Yojana. Ultimately, it is the State Governments that have to implement the programme. The high aims of the scheme should not be thwarted in actual implementation.

Excessive foodgrain stocks pose continuing problems of storage and disposal. The Budget has promised corrective action on the basis of a report of a high-level committee on long-term green policy.

The current situation in the open-ended programme by the Food Corporation of India at high purchase prices and disposal at heavily subsidised rates is not sustainable. The diagnosis is right, but whether the political parties in the NDA will accept the right cure for the disease is doubtful.

Turning to infrastructure, the Budget promises much in terms of direction but nothing in terms of concrete action. The restoration of financial viability in the power sector is emphasised. One of the foremost challenges not only for the power sector but also for the fiscal health of the State Governments is to reverse the trend of negative returns on power. Not much has happened in this area since the last Budget.

The Finance Minister has put forward a redesigned programme, the Accelerated Power Development and Reform Programme with the focus shifted from generation to transmission and distribution. Ultimately, the question is one of biting the bullet of tariff increase apart from preventing power theft. This is a political issue and it is doubtful whether the Finance Minister will be able to make much progress on this part of the Budget announcement. The most critical element in economic reform, that is, the transformation of India's power sector, is falling a victim to politics.

With respect to urban reform, the Finance Minister has tried to link financial incentives with the progress of reforms in this sector through an Urban Reform Incentive Fund to provide reform-linked assistance to States. These include difficult tasks such as reform of rent control laws, repeal of urban land ceiling act and changes in Stamp Act. An ambitious agenda indeed! Lofty intentions without supportive legislation are bound to fail. This only emphasises the fact that there should be a clear roadmap of how to reach the goals. The Urban Reform Incentive Fund with an allocation of Rs 500 crore will meet the purpose.

The proposal to set up a Pooled Finance Development Scheme is interesting. It will provide credit enhancement to assist local bodies to access market borrowing on a creditworthy basis. Municipal tax-free bonds are to be allowed up to Rs 500 crore in 2002-03. What would be involved additionally is a system of rating of urban municipalities with a view to ranking them from the point of eligibility and creditworthiness.

Yet another praiseworthy initiative is the setting up of an Infrastructure Equity Fund of Rs 1,000 crore to provide equity investments for infrastructure projects.

This fund will be managed by the Infrastructure Development Finance Company Ltd (IDFC), which will also coordinate debt financing by financial institutions and banks of larger infrastructure projects.

As for the banking sector, the Finance Minister has reported progress in the recovery of NPAs, which as a percentage of net advances have declined to 6.7 per cent from 7.4 per cent the previous year. Certain fiscal concessions have also been provided to help banks and financial institutions handle NPAs. A Pilot Asset Reconstruction Company is proposed to be set up by June 30, 2002. Foreign banks will be given the option of either operating as branches of their parent banks or setting up subsidiaries. This should please international financial centres.

The Finance Minister has also made bold to make some modest relaxations to the capital account. Besides full convertibility of deposit schemes for non-resident Indians, Indian companies have been allowed to invest up to $100 million on an annual basis, up from $50 million now.

An intriguing reform is that Indian mutual funds will now be allowed to invest in rated securities with fully convertible currencies. Is this compatible with the halting performance of these funds even in the domestic market?

The Finance Minister's speech tackles the budgetary consequences of the removal of the Administered Price Mechanism (APM) for petroleum products. The Oil Pool Account will be dismantled on April 1, 2002. The subsidies consequent to the dismantling will now come to be borne directly by the Budget. The Finance Minister has taken the bold decision of increasing the prices of kerosene and LPG, albeit by a marginal amount. However, the hubbub in the House on the announcement of the increases does not appear to justify promises of smoothness of these changes.

Turning to Part-B of the Budget speech, the Finance Minister has done his best to minimise the impact of his additional resource mobilisation effort. At the same time, one cannot help noting that the change in the dividend taxation is not fully justified.

The elegance of Mr P. Chidambaram's solution was that double taxation of dividends was eliminated and the collection effort of the Tax Department reduced by making the corporate pay an equivalent tax on behalf of the dividend-earners.

r Sinha's reform is a retrograde step and is at the cost of the efficiency and the principle of avoidance of double taxation. It has received adverse notice from the stock market.

Mr Sinha has tinkered marginally with the structure of excises and Customs. He has kept to his original role of achieving a taxpayer-friendly system. He has accepted the recommendations of the Shome Advisory Group on the taxation of savings to some extent. Whether this will have an adverse impact on the total collection of small savings remains to be seen.

The Finance Minister's efforts should be aimed at garnering as much small savings and taxes as possible. Whether Mr Sinha's suggested solution will yield the optimal result with respect to savings remains to be seen.

On the whole, the Budget is an effort in constrained optimisation, a second best solution. The markets have responded adversely.

The test of the Budget hangs on its implementation. The Finance Minister must have the opportunity to rectify the distortions that have crept in to the formulation of his proposals, but without going back on the basic premise of continued reform. Two cheers for Mr Sinha for a well-meaning effort in a difficult situation.

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