Economy: Budget; The budget Sinha didn't present

India Today presents an alternate budget for 1999- 2000 -- a budget that could have triggered immediate recovery and earned the finance minister a place in India's economic history.

1. The nine months since I presented the last budget have been arduous for the Indian economy. A slow growth in domestic demand prevented an industrial upturn, and the worsening East Asian crisis ruled out any export rebound. Yet a revival is not too far away. Recoveries are often not seen as such until several months after they really happen. Between April and December 1998, the capital goods and consumer durable goods industries had grown by a healthy 9.8 per cent and 2.8 per cent. More importantly, agriculture harvest has risen by an impressive 5.3 per cent in 1998-99, laying the foundation for solid economic recovery. In the making of this budget I have kept in mind three classic prescriptions of economic revival: stimulatory policies, strong business confidence and low inflation.

POLICY PRESCRIPTION

ť Statutory status to disinvestment commission.
ť Equity sale of at least two profit-making PSUs to people.
ťIn principle clearance to the six prime minister advisory council reports.
ťComplete convertibility of rupee on current account.
ťRevitalisation of Brand Equity Fund for exports.
ťDe-reservation of all products reserved for SSIs which are imported freely or not being produced by SSIs.

EXPENDITURE PRESCRIPTION

ťA statutory ceiling on Central government debt.
ťFive-year freeze on Central government recruitment.
ťPlan support to states linked to reduction in subsidies.
ťPhase out the current fertiliser subsidy scheme.
ťFive-year plan to raise the Centre's direct investment spending to its 1991 level of 1.4 per cent of GDP.

TAX PRESCRIPTION

ťReplacement of central excise duty with value-added tax in three years' time.
ťNo change in income and corporation tax rate.
ťReduction in excise slabs from 11 to five in 1999-2000, and to four next year.
ťAbolition of 5 per cent special customs duty.
ťTax exemptions for interest payments of up to Rs 6,250 per month on all housing loans.
ťImposition of agriculture-income tax on rich farmers.

2. Agriculture's stellar performance this year has underscored the need to effect real reforms in this sector. Years of mindless allocation of resources to agriculture, irrigation and poverty alleviation without any attention to its end-use has created a situation where despite partaking a lion's share of government spending, productivity and efficiency in the rural economy remain low. At the cost of being non-populist, I will desist from announcing any new scheme and instead propose consolidation of a plethora of existing schemes.

3. As a first step, I am unifying all the rural-employment schemes into one and placing them at the disposal of gram panchayats. It is my Government's belief that spending on all rural development and anti-poverty programmes should be done by panchayats. This way the local community will be responsible and accountable for the efficiency of expenditure. As a guiding rule, the new programmes will not be individual- specific, but community-specific since community assets have lesser scope for misuse. Economic growth has played a much bigger role in attacking poverty over the past two decades than anti-poverty programmes. I would like the House to note that the rate of decline in poverty ratio in the late '80s and early '90s has been double the rate in the '70s.

4. I am conscious that Indian industry is expecting the budget to kick-start growth. Unfortunately, it is no more possible for the budget to revive growth in the short run. By way of the Fifth Pay Commission and reductions in income-tax rates, the previous budgets have created ample income growth for urban consumers. An agriculture recovery this year will also energise rural demand. I am, however, in a position to address an immediate problem of industry: high cost of capital. I propose to cut interest rates on small savings by one percentage point with immediate effect. I expect this to be a signal for across the board reduction in interest rates in the financial market.

5. Sentiments drive investment. As was hinted in this year's Economic Survey, political instability in the past four years has created an impression of policy uncertainty among many investors. To put an end to such uncertainty I propose to launch a second generation of reforms right away. To begin with, I am happy to announce that the Government has in principle accepted all the recommendations of the six task reports of the Prime Minister's Business Advisory Council. Since the recommendations cover a large area involving agro-industries, infrastructure, capital and financial markets, knowledge-based and services industries, and legal reforms, concerned ministries will soon come out with individual deadlines for implementation. Within a week, my ministry will also table a discussion paper on more complex areas of reforms like changes in labour laws. I urge the honourable members to help create a consensus on such vexed but important issues so that investors are not kept on tenterhooks. I would also like to state that be it in agriculture or industry, a large part of the future reform agenda lies with states which have to take up reforms on a war footing. Repeal of the Urban Land Ceiling (Regulation) Act is one example where the Centre's initiative won't yield benefits unless states also follow suit.

6. There has been a debate on justification for reservation of goods for exclusive production in small-scale industries (SSIs). Currently over 800 items are reserved for SSI production. However, out of these as many as 563 items are also under the free-import regime. This has created a situation where large domestic firms are barred to produce the item, even as foreign firms could sell and compete with SSIs for those items. To end this anachronism I propose to de-reserve all the 563 items over the next three years. Additionally there are over 150 reserved items that are not being produced by the SSIs. I propose to de-reserve these items with effect from June 1, 1999.

7. In my last budget, I had outlined the Government's strategy to privatise Indian Airlines in three years' time with a general intention of reducing government holding to 26 per cent in all non-strategic public-sector undertakings (PSUs). The lacklustre market and shortage of time did not allow us to move ahead with the target. To ensure that privatisation is smooth, I propose to grant statutory status to the Disinvestment Commission. To involve the people at large in the privatisation programme, I propose to sell equity of select profit-making efficient PSUs to small investors. There is a lot of cynicism about the method I have adopted to achieve the 1998-99 disinvestment target. Buyback of shares by PSUs is an alternative mechanism to lower government holding and increase management autonomy which are desirable objectives of any disinvestment programme.

8. A vibrant capital market is the key to fund investments. Later on in my speech I will be announcing certain tax changes which will lure small investors back to the primary market. I propose to amend the Securities Contracts and Regulation Act to allow for derivatives trading and expand the debt market. On banking reforms, reduction in non-performing assets remains the key concern of the Government. I also wish to refer to a more fundamental issue of government control over public- sector banks. As long as the rbi or the Government own banks, their management will be risk averse and less business savvy. My ministry, in consultation with the RBI, will devise means to reduce government control to a minority level in most public-sector banks within a three-year time frame.

9. Improvement in India's compe-titiveness is incumbent on export revival. It will be the endeavour of my Government to bring down the credit and transaction cost of exports in India to international levels. I also plan to revitalise the India Brand Equity Fund, which was launched in 1995 to promote Made In India brands. The Government has also decided to expand the list of automatic approval of foreign direct investment.

10. The non-plan expenditure for 1998-99 is likely to be Rs 17,616 crore more than the target. Most of this expenditure overrun is on account of higher subsidy outgo, larger interest payments and galloping administrative expenses. To rein in non-plan revenue expenditure I propose two radical reforms. First, I will introduce a bill in the current session of Parliament, which will seek to provide a statutory ceiling on government debt. Second, I propose to freeze recruitment in the Central Government for the next five years. This will reduce the Centre's manpower by 15 per cent.

11. The plan expenditure fell short of the target by Rs 3,631 crore in 1998-99. The shortfall was even more telling in critical sectors like agriculture (28 per cent) and energy (31 per cent). These shortfalls have been due to the failure of the respective departments to generate internal resources. To eliminate this problem, I have pared down the plan expenditure targets for 1999-2000 and have linked them realistically with departments' ability to generate internal resources.

12. The rationalisation of income and corporation taxes has yielded good returns. We have over achieved the collection target for both the taxes in 1998-99 and do not propose any changes in their rates. The long-term capital-gains tax on transfer of share and securities is currently 20 per cent. I propose to reduce it to 10 per cent. This will encourage people to invest in equity shares. With the same purpose, I propose to exempt income from mutual funds with over 50 per cent investment in equity from dividend tax. I also propose to raise the tax exemption limit of interest on house loans from the current Rs 30,000 per annum to Rs 75,000 per annum. My other proposals on direct taxes are in the Finance Bill.

13. On indirect taxes, I have major reforms to announce. Keeping my promise in the last budget, I propose to reduce the number of excise rates from 11 to five in 1999-2000, to four in the following year and eventually to three rates the year after. These rates will be 8 per cent, 16 per cent, 25 per cent and 30 per cent and 40 per cent for 1999-2000. Similarly, I am also pruning the seven rates of customs duty to five, four and three rates in the next three years. The rates will be 5 per cent, 15 per cent, 25 per cent, 35 per cent and 40 per cent for 1999-2000. I propose to let the 5 per cent special customs duty imposed in 1996 and 1997 lapse with effect from April 1, 1999. This will bring down the peak rate of tariffs from 45 per cent to 40 per cent. Those who have labelled the Government protectionist should take note of this. With my tax and expenditure proposals I have set in motion a process of fiscal consolidation and high economic growth. I expect the fiscal deficit to fall to 5.5 per cent of the gross domestic product (GDP) in 1999-2000 and the GDP itself to rise by at least 7 per cent.