Economy: Changing Tack

Sinha's hasty roll-backs may have silenced his critics for now. But can they kickstart the economy?

When Finance Minister Yashwant Sinha decided to roll back many of the proposals he made in the budget in less than two weeks of their presentation, it was a politically calculated move. Having accommodated most of the Opposition's suggestions, he believes there will be no scope for his opponents to point a finger at him when the House meets to pass the Finance Bill '98-99 next month. As one opposition leader asked, "What cut motions can you propose when the finance minister has backtracked on every sensitive issue?"

For the moment Sinha may have scored a point politically but the hasty changes make his Government look vulnerable. Besides, worrying developments on the economic front could negate the impact of the roll-backs. Fleeing foreign institutional investors are eroding investor confidence and need to be given a convincing reason to stay put. Says Pravin Visaria, director, Institute of Economic Growth: "Post-sanctions, the emphasis should have been on economic strength. But even now capital markets and the industry are not upbeat."

Turbulence on the foreign exchange front will also necessitate stabilisation moves but they cannot go hand in hand with inflationary growth oriented policies. As a result, efforts to kickstart the economy will suffer. Says Pradeep Srivastava, RBI chair professor at ICRIER and chief economist of NCAER: "Given the external environment and the weakening rupee, it would be unrealistic to push for a 7-7.5 per cent growth this year. From 5 per cent we may achieve 6-6.5 per cent but that is the new Hindu rate of growth."

Three years of speed growth -- 1993-94 to 1995-96, when the GDP growth averaged 7-7.5 per cent -- had the nation hooked on sky-rocketing pay packages and bulging profits. Two successive years of subsequent slowdown made a sudden difference. By election time this year, it was clear that whichever government took charge, re-energising the economy in the shortest time would have to be accorded priority if it were to survive.

That seems to be reason for the rollbacks. Barring urea prices, all other changes aim at revitalising growth. In the budget, customs duty was increased by 8 per cent across the board. But because this was to be levied on the price, inclusive of all duties, the effective rate of protection worked out to 11-16 per cent, far beyond the industry demand of 5-7 per cent (which is also equal to the sales tax and local levies that domestic players pay). The halving of the hike corrects the distortion and ensures that input costs do not shoot dramatically for the manufacturing industry.

The move to withdraw the levy of 2 per cent withholding tax on external commercial borrowings, exemption given to capital goods imports for exports from payment of customs duty and roll-back of the petroleum price hike to Re 1 per litre (against Rs 4 for a city like Delhi) are also steps to ensure that budgetary proposals do not impede growth. The Government has gone a step further to reiterate that even now it will consider any suggestion that could propel growth.

In the past too, governments have been responsive to criticism specially as regards proposals made in their first budgets. Former Finance Minister P. Chidambaram had to withdraw his proposal to introduce non-voting shares following opposition, while the architect of reforms, Manmohan Singh, had to reduce the hike in the price of urea from 40 per cent to 30 per cent in his first budget following public protest. To that extent, Sinha's roll-backs are nothing new. But it is the haste in which he has acted that is raising eyebrows. His political opponents may have nothing to say for now but if cracks in the economy begin to widen, they are bound to trigger a fresh bout of criticism.

That may not be too far away. With the yen breaching new lows in recent times vis-a-vis other currencies and the south Asian economies still in a spin, the rupee has been constantly shedding weight against the dollar. It could further plunge to worrying levels, in which case RBI will step in to suck out excess liquidity, pushing up interest rates. Then again high interest rates discourages investment. "The external situation will have to stabilise and investor confidence will have to boosted soon," says M. Roy, deputy director-general, Confederation of Indian Industry. "If it happens in the next two months, there is still hope." Sinha too is banking on that.

P CHIDAMBARAM
Finance Minister 1996-97

MANMOHAN SINGH
Finance Minister 1991-96

Proposal: Non-voting shares by firms up to 25 per cent of the issued capital.
Change: This raised a furore and in December 1996 the relevant amendment to Companies Act was withdrawn.

Proposal: Minimum alternate tax (MAT) on zero tax-paying companies.
Change: Scheme was amended a year later in the 1997-98 budget. Export profits were exempted and firms could claim credit for MAT paid which could be carried forward for the next five assessment years. In the year in which tax was actually payable, this credit could be adjusted.

Proposal: In 1997-98 levied a service tax on transportation of goods by road.
Change: The tax was withdrawn when transporters went on strike.

Proposal: Increase in the price of urea by 40 per cent in 1991-92 budget. To reduce subsidy.
Change: Political opposition forced a cut in the price hike to 30 per cent within three weeks.

Proposal: Government to contribute Rs 100 crore to the Rajiv Gandhi Foundation over five years.
Change: Sonia Gandhi refused to accept the contribution following a furore in Parliament.

Proposal: Tax deduction at source on interest accruing on term deposits with banks in the 1991-92 budget. Change: Taxpayers and members of Parliament opposed the move. Directive was withdrawn in the 1992-93 budget.

Proposal: New expenditure tax on air-conditioned restaurants in the 1991-92 budget.
Change: Levy withdrawn a year later following public protest.