Financial Daily from THE HINDU group of publications
Monday, Mar 04, 2002
Industry & Economy - Disinvestment
Budget 2002-03 -- Sinha errs on the side of caution
S. D. Naik
THE Finance Minister, Mr Yashwant Sinha, has missed an opportunity to provide a big thrust to the growth process. The thrust of the 2002-03 Budget, his fifth, is on agriculture and infrastructure development to stimulate the growth of the economy. There are also some sops to specific sectors such as textiles, steel, tourism, housing, and small-scale industries as also some initiatives to draw a roadmap for reforms and induce States to fall in line by linking assistance to reforms undertaken. But the Budget contains no bold measures or a clear strategy to lift the economy from the low-growth trajectory it has been in over the past four years.
True, the degree of freedom available to the Finance Minister in the formulation of the Budget strategy was severely constrained by his Budget arithmetic going haywire this fiscal with a massive shortfall of Rs 20,000 crore in tax revenues. Last year's tax cuts were not compensated by higher growth of the economy, or better compliance and tax administration.
The continuing industrial slowdown and the accentuating demand recession have had a dampening effect on indirect tax collections. Despite the fact that non-Plan expenditure during 2001-02 was lower by more than Rs10,000 crore, the year ended with a higher fiscal deficit of 5.7 per cent in the revised estimate against the Budget estimate of 4.7 per cent.
The Budget starts with a conservative estimate of GDP growth of 5.5-6 per cent for 2002-03, not much different from the 5.4 per cent estimated for 2001-02, and pegs the fiscal deficit at 5.3 per cent. This is a big climb down from the vision of 8-10 per cent growth.
Clearly, after last year's debacle, the Finance Minister seems to have refrained from selling dreams and opted for an overcautious and down-to-earth Budget. He has refrained from offering any sops to the corporate sector or the individual taxpayers. In fact, his Budget is a bit harsh on the salaried middle-class. The 2 per cent Gujarat surcharge imposed last year has been replaced by a 5 per cent Defence surcharge. Moreover, the exemptions available on contractual savings have been diluted for taxpayers earning between Rs 1.25 lakh and Rs 5 lakhs and completely withdrawn for those earning above Rs 5 lakhs. The interest rates on small savings have been cut by 50 basis points.
What is disappointing, however, is that the Finance Minister has not made any major effort to cut down the burgeoning subsidies even as he has charted a roadmap for reforms in his Budget, including the rationalisation of excise duties and lowering of the peak rate of Customs duty from 35 per cent to 30 per cent; the peak rate is further slated to go down to 20 per cent by 2004-05. In a feeble effort, the prices of urea and DPA have been raised by 5 per cent and the subsidy on LPG and kerosene has been reduced. But the massive food subsidy has been left untouched and there is no effort at raising user charges on utilities.
The Budget proposes several measures to decontrol and deregulate agriculture and promises to usher in the third revolution in agriculture after the Green Revolution and the White Revolution, namely, agricultural diversification and food processing. The Finance Minister has announced a Credit Linked Subsidy Scheme for construction of cold storages, measures to improve the flow of institutional credit to the sector, more funds for the Rural Infrastructure Development Fund (RIDF) VIII and a cut in interest rate on these funds from 10.5 per cent to 8.5 per cent.
The allocation for Accelerated Irrigation Benefit Programmes (AIBP) has been raised from Rs 2,000 crore to Rs 2,800 crore to assist States accelerate the completion of unfinished medium and major irrigation projects, and also to undertake reforms by revising user-charges and setting up water users' associations. A new corporation for agriculture insurance is to be promoted by public sector general insurance companies. However, all these measures will not make a big difference unless there is better implementation and governance. For instance, the fund utilisation from the RIDF scheme is only 40 per cent so far, as the States have not been able to bring in their share nor come up with adequate number of new projects.
The Budget also proposes to strengthen agriculture extension and research and measures to promote farm exports but contains no bold measures to deal with the mounting foodgrains stocks in FCI godowns or the management of the food economy. The success in agricultural diversification would largely depend on the ability of the Centre to cut down procurements and the minimum support prices offered for wheat and rice. These are clearly outside the purview of the Finance Ministry and guided by political compulsions and vote bank politics.
The Plan outlay for power, roads and Railways has been increased by 22 per cent, 39 per cent and 23 per cent respectively to a total of Rs 37,919 crore. Also, the Budget proposes to set up an Infrastructure Equity Fund of Rs 1,000 crore to help in providing equity investment for infrastructure projects.
Major ports are to be corporatised in phases and international airports at Delhi, Mumbai, Chennai and Kolkata are to be upgraded to the worldclass standards by inducting private sector management and investment through leasing systems. Private sector participation in greenfield airport projects is proposed to be encouraged through a package of concessions.
The Budget also lays emphasis on speeding up power sector reforms. The Power Ministry has already signed memoranda of understandings (MoUs) with 20 States and is expected to complete the exercise with the remaining States soon.
The APDP is being redesigned as the Accelerated Power Development and Reform Programme (APDRP), with an enhanced Plan allocation of Rs 3,500 crore for 2002-03, up from Rs 1,500 crore this fiscal. The access of the States to the Fund will be on the basis of agreed reform programmes, the center piece of which would be the narrowing and ultimate elimination of the gap between unit cost of supply and revenue realisation within a specified time frame. A high-level monitoring group will oversee the progress of this programme and allocations for the same will be augmented by loans on concessional terms from the Power Finance Corporation.
The Finance Minister has rightly stated: "estoration of financial viability in the power sector remains crucial. The average rate of return for all State Electricity Boards (SEBs) is about minus 40 per cent and their combined losses continue to increase. Hence, this is one of the foremost challenges not only in the power sector but also for the fiscal health of the State Governments and the overall performance of the economy".
The success in infrastructure development would, however, depend a great deal on implementation and governance. In the current fiscal (2001-02) the Government had planned to spend Rs 10,000 crore for last-mile projects. But Planning Commission estimates show that only around Rs 3,600 crore was spent on such projects. Of this, half went to the Konkan Railway, primarily to retire a part of the outstanding debt of Konkan Railway Corporation.
The Finance Minister has kept the disinvestments target for 2002-03 at Rs.12,000 crore, the same as in the previous year. Given the fact that some of the big ticket PSUs, including some of the oil companies are on the block, and the Government has already overcome major hurdles in the way of privatisation, this target could have been much more ambitious. Moreover, apart from the disinvestments of profit-making PSUs, it is important to speed up the strategic sales of loss-making PSUs to stop the heavy drain on the national exchaquer. The bad news here is that six loss-making PSUs Bharat Leather, Praga Tools, Scooters India, Bharat Pumps and Compressors, Bharat Brakes and Valves and Reyrolle Burn Ltd were recently returned back to the Department of Heavy Industry as there were no bidders.
In the current year, the Government has already realised Rs 5,573 crore through disinvestment, including Rs 2,350 crore by way of special dividends and withdrawal of reserves from VSNL, STC and MMTC. This amount excludes the proceeds from 10 PSUs, which are to be divested by March end. These include Maruti Udyog, IPCL, Hindustan Zinc and the remaining hotels of the ITDC. The Government is examining the recommendations of the Disinvestment Commission on four companies Neyveli Lignite Corporation, Manganese Ore (India) Ltd, Rites, and Projects and Equipment Corporation.
Savings and investment
A major disappointment is the absence in the Budget of any incentives to promote savings and investment. In fact, the household savers have been penalised by reducing the administered interest rates further and withdrawal of tax exemptions. While the Tenth Plan Approach Paper has recommended measures to raise the gross savings rate to at least 28 per cent of the GDP, the current rate is hovering around 23 per cent over the past few year.
The Government savings have turned negative. The investment rate is also languishing around 24 per cent as the country has not been able to attract foreign direct investment (FDI) of $5-6 billion per annum, leave alone the targeted $10 billion.
The Budget also contains no incentives for the private corporate sector to step up investment except allowing companies to claim an additional 15 per cent depreciation on new plant and machinery. Only some benefit has been extended to foreign companies by bring down the tax rate on them to 40 per cent from 48 per cent. Reintroduction of investment allowance and a 5 per cent cut in corporate tax to bring it on par with personal income tax would have transformed the sentiment dramatically.
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