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An overdose of expectations and poor packaging take the shine off Finance Minister Yashwant Sinha's not-so-bad budget, sinking his popularity overnight

By Rohit Saran with Robin Abreu

The pre-release hype was electrifying. The millennium's first budget show promised action, trauma, sacrifice and patriotism. But like most Bollywood potboilers, the outcome was bland and predictable.
Yet if Finance Minister Yashwant Sinha's third Union budget did not become a flop show it was because it did contain some innovative -- and even bold -- measures. Only they all fell short of the expectations he himself had raised. Result: a poor initial draw at the stock markets. Comments Sunil Bhandare, adviser with Tata Services: "The pedestrian packaging makes the budget appear worse than it really is."

To be fair, Sinha hadn't ever spelt out what he meant by his repeated warnings of a hard budget. But observers expected it to be hard on government and populism. More specifically, a clear and bold programme of administrative downsizing, a rationalisation of subsidies and an outright privatisation plan were widely expected. Why, even the Finance Ministry's Economic Survey, released just a day before the budget, had spelt out these and many other tasks. No wonder, the outcome was such a resounding disappointment initially. Complains Subodh Bhargava, CEO, Eicher: "The budget was expected to be harsh on public expenditure. Instead it is harsh on industry."

Stoking the expectations was also the state of the economy. A recovering industry and exports, one of the lowest ever rates of inflation and fervent stock markets presented Sinha with an opportunity to launch a reform drive that could propel India into an orbit of an annual growth rate of 7 per cent or more. "The finance minister blew up a golden opportunity to reinvigorate growth," says former finance minister Manmohan Singh. Politically too, Sinha was on a strong wicket with the NDA having just returned to power in October 1999. Says Indira Rajaraman, RBI professor at NIPFP: "Not since Rajiv Gandhi's time was a government so comfortably placed to undertake big-bang reforms."
Beyond the expectations and opportunities though, the budget wasn't a bad deal. Nothing testifies it better than the positive swing in the stock markets and expert opinions on March 1. To make sense of the sharply divided jury on Budget 2000 India Today ran it through a test on five major expectations:

EXPENDITURE WILL BE SLASHED
Sinha failed squarely
The finance minister was almost universally expected to attack public expenditure swiftly and decisively. Government spending has stretched to the utmost. During 1999-2000 the Centre's borrowing target overshot by a massive Rs 29,000 crore, taking the total borrowing in the year to Rs 1,08,898 crore and interest payments to an all-time high of Rs 91,425 crore. At this level, over 72 per cent of the Centre's tax income is spent on interest payment. Granted the fall of a government and the Kargil war did make many expenditure calculations go awry, but the problems run much deeper.
The bill for salaries and explicit subsidies (mainly food and fertiliser) alone adds up to Rs 60,000 crore every year -- nearly a fifth of total government spending. Clearly, cutting administrative flab and subsidies should be both imperative and immediate. But Sinha's attempts are half-baked at best. The task of government downsizing has been passed on to the newly appointed Expenditure Reforms Commission with not a single specific target of savings or staff reduction being fixed. The anticipated reduction in food subsidy by raising the prices of PDS sugar will be nullified by the expense incurred on doubling foodgrain allocation to families below the poverty line.
The only attainable subsidy cut is on fertilisers, whose prices have been raised by 7 to 15 per cent. Remarks D.K. Srivastava, an expert on subsidies: "Next year's (2000-2001) expenditure and deficit figures belie hopes of any significant expenditure reduction." Sinha's -- and the Government's -- track record also does not lend credibility to claims of expenditure reduction. The budget itself announced setting up of a new ministry (tribal welfare) and a new department (drinking water). This when the Atal Bihari Vajpayee Government already has a strong force of 72 ministers. No wonder a post-budget snap poll of 50-odd CEOs rated Sinha's expenditure-control measures only 1.5 out of 10.

TAXES WILL BE REFORMED, NOT RAISED
But Sinha did both
Sinha's tax proposals came for the sharpest criticism from industry, perhaps prematurely. True in the name of creating a single rate of excise duty (the number of excise rates have been reduced from six to four) he has added to industry's confusion . True, the imposition of 5 per cent income-tax surcharge would have been more acceptable immediately after the Kargil war. Also the tax on export income could have come after a year or so. But the true worth of Sinha's tax reforms lies in procedural simplifications.
Excise-duty evaluations will now be done on the basis of factory records rather than statutory records. This should mitigate the inspector raj substantially. Also, excise payments don't have to be made on a daily basis and can now be done once in 15 days. This provides industries with an opportunity to earn interest on the money saved for fortnights. Experts are divided over the appropriateness of taxing export income now. While the majority thinks it's a correct measure, some contend that the Government should have waited for export growth to stabilise at a high rate for a few years before imposing the tax. However, there is unanimous opposition to raising tax on corporate dividend from 10 to 20 per cent and increase in capital gains tax on debt mutual funds.

INFOTECH WILL BE NURTURED
Sinha did it well and good
The least controlled sector of the economy -- it -- was also expected to be the most favoured. And Sinha did live up to that. He simplified policy on venture capital; granted rebates on import of equipment by Internet service providers; and slashed customs duty on computer hardware. Hike in the limit on FII investment from 30 to 40 per cent of a company's equity will also help the IT sector.
Yet, if there is discontent among the captains of the Indian knowledge economy, it is on the following counts: imposition of tax on income of software exports; no amendment in the tax treatment of shares distributed under employee stock option plans (ESOPS); and no increase in the expense limit to acquire a company abroad. Right now the impact of tax on income from software exports is merely notional. That's because more than 90 per cent of India's software exporters are located in one or another software technology park and hence enjoy a 10-year tax holiday. Since most units are four-five years old, their incomes will be exempt from taxes for five-six years. But new software units will not get any exemptions.
Currently ESOP is taxed at the time of allotment of shares on the basis of their notional value. The tax is levied irrespective of whether or not the shares have been sold to generate income. Clearly, a sounder proposition is to shift the taxation to the time when stocks are actually sold. That's what the industry demanded. Though Sinha has not granted it yet, he has promised to do so in future. He has also promised to raise the current $100-million limit on acquisition of software companies abroad.

DISINVESTMENT WILL DEEPEN
Sinha only talked tough
Budget 2000's performance on privatisation is most contrasting. Results indicate an abject failure. Even the modest target of Rs 10,000 crore for 1999-2000 was underachieved by 74 per cent, with public-sector equity worth only Rs 2,600 crore sold during the year. Given the potential and need for privatisation, the next year's target of Rs 10,000 crore is also minuscule.
Yet, in terms of commitments and promises Sinha has been bolder than ever. For the first time a finance minister has talked of an outright sale of sick PSUs. He is also committed to reducing the government holding in all public-sector banks to 33 per cent. The announcement sounds more radical than it really is since the reduction in government holding will not happen through sale of equity but through an increase in the equity base of banks which will be widely held among the Indian public. This will ensure that the Government's holding in banks comes down, without selling its own stocks. But the Government will also retain control over banks and hence deny them management autonomy.
Sinha's more credible feat is the resolve to stop the use of disinvestment proceeds to cover deficits and instead spend it on social projects and for retiring of public debt. That would for the first time delink the process of disinvestment from the budget.

GROWTH WILL BE BOOSTED
Sinha gave it a miss
The ultimate test of Budget 2000 is what it does for growth. By his own admission, Sinha is aiming at a GDP growth rate of over 7 per cent. But he has done little to enable that growth. Right now, the biggest drag on growth is falling investments and savings. India's gross investment rate slipped from 26.2 per cent of the GDP in 1997-98 to 23.4 per cent in 1998-99. The budget does nothing to stem this fall. Complains Srivastava: "The budget does not emit any growth impulse." That's because Sinha has almost given up on his fight against deficit.
Not only did he miss the fiscal deficit target for 1999-2000 by a mile (it was 5.6 per cent of the GDP against the target of 4.1 per cent), he has provided for a high deficit of 5.1 per cent of the GDP for 2000-2001. Given the track record of the past decade, this target will certainly be breached. That means no chances of revival in public-sector investments. The stimuli for private investments are also few, namely one percentage point reduction in interest rate on general provident fund and withdrawal of interest tax.
Sinha can rightly argue that over the past 10 years budgets have lost their significance as direct growth enablers. But at the same time budgets have gained in significance as strategy setters and sentiment boosters. It is on this count that Sinha has missed an opportunity. Says Bhandare: "The budget does not aid growth either symbolically or substantially." This is one lesson he could have learnt from his last budget.

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