Did He Bite The Bullet, Or Did The Bullet Bite Him?

Yashwant Sinha was expected to present a hard Budget, but has come out with one that is both hard and soft in spots, like an overripe banana. He has shown courage enough to slash food and fertiliser subsidies, tax exports (including software), increase the dividend tax, and marginally increase the top income tax rate. He has done his bit for the venture.

But the bottomline is a fiscal deficit of 5.1 per cent, which foreign institutional investors will bemoan as woefully soft. This may be a greater reason for the stock market plunge than his entirely justified move to tax export profits in stages over the next five years.

One reason for cheer is that the word swadeshi seems to have disappeared from his lexicon. He has cut the peak import tariff from 40 per cent to 35 per cent, reducing the overall level of protection. And he has allowed foreign institutional investors to own up to 40 per cent of the equity of Indian companies, against the earlier ceiling of 30 per cent. This new-found confidence stems from his conviction that India can now throw up multinationals of its own, and he has promised to relax guidelines for Indians wanting to buy companies abroad.

Mr Sinha does not believe in fiscal extremism, and can point to plenty of evidence to back his stance. Despite a fiscal deficit of 5.6 per cent in ’99-00, interest rates came down, inflation fell to a record low and foreign exchange reserves soared.

In these circumstances, he sees no reason to be so tough fiscally that he chokes off the emerging industrial recovery. Faced with the demands of Kargil, Mamata Bannerjee and the interim award of the Finance Commission, he thinks he has been tough enough. Maybe rapid industrial growth will vindicate him. Still, observers with a longer view will worry that if this is what the BJP regards as a tough Budget, what will a soft one look like?

The fiscal deficit in Mr Sinha’s three budgets stand at 5.1 per cent, 5.6 per cent and 5.1 per cent of GDP respectively. The level in the preceding three years was 4.1 per cent, 4.0 per cent and 4.7 per cent.

Worse, an increasing share of this fiscal deficit is used for salaries and stores rather than investment (the share of the revenue deficit in the fiscal deficit has risen steadily from 63 per cent the year before he took office to 69 per cent in the coming year). So the public debt is rising inexorably and interest payments will cross the milestone of Rs 100,000 next year. Indeed, cynics will say that “biting the bullet” for Mr Sinha means providing more bullets for the armed forces.

Defence expenditure is up a whopping Rs 13,000 crore to over Rs 59,000 crore, the biggest increase ever. This represents a rise from 2.3 per cent to 3 per cent of GDP (excluding defence civilian expenditure). Members of Parliament cheered when he announced his defence spending binge, with- out even thinking where the money was to come from.

Downsizing the bloated bureaucracy could be the answer, but Mr Sinha is not willing to tackle the problem head on, and instead waltzes round it by talking of new hiring norms, retraining and a voluntary retirement scheme.

Unifying Saraswati (knowledge) and Lakshmi (wealth) may be trickier than he thinks; the stock markets have reacted negatively. Mr Sinha has certainly done his bit for venture capital funds, which should now take off.

The markets were prepared for some taxation of software exports, but not for a complete phase-out in five years. Ordinary folk will wonder why people who are supposed to be the richest Indians in the world should have any difficulty in paying a little income tax, but the Saraswati-watchers in the markets were not impressed. The cut in import duties on computers and accessories and cellphones is a welcome move. This should certainly help spread the infotech revolution. Mr Sinha belongs to the school which believes that infrastructure should not be taxed, and phones and computer are certainly the infrastructure of the knowledge business.

Those who expected Mr Sinha to come out with a detailed, time- bound programme for disinvestment, naming the companies involved, will be disappointed. He says he will bring down the government stake in banks to 33 per cent but not change government control, which markets will interpret as reducing rather than enhancing corporate accountability.

The corporate tax rate remains untouched but the minimum alternate tax is down from 10 per cent to 7.5 per cent of book profits. This means extra jam immediately for affected companies. It should help what used to be called zero tax companies. His doubling of the dividend tax from 10 per cent to 20 per cent has attracted some flak. But this is still far less than the 33 per cent most people would have to pay on dividends under the old system. It provides an incentive for companies to retain rather than distribute profits, and that is not a bad thing.

Income tax rates have gone up a smidgeon, from 33 per cent to 34.5 per cent for those earning more than Rs 1.5 lakh per year. The burden cannot be called excessive in difficult fiscal times. In spending, Mr Sinha says he has focused on rural and infrastructure development, which are certainly the right priorities. He says the annual plan will be up from Rs 77,000 crore budgeted last year to R 88,100 crore next year, which seems a big jump. Yet calculations show that the share of capital spending in total spending will go up just a bit from 16.7 per cent to 17.0 per cent, far below the 22.2 per cent and 22.3 per cent in Mr Chidambaram’s two budgets. Clearly the burden of interest, defence and Pay Commission has taken its toll.

The surcharge on petrol and diesel has not been used in full for highway projects, yet it seems Rs 2,500 crore will now go for rural roads and almost Rs 2,000 crore for national highways. So some movement is visible in infrastructure.

What do you think?