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Sinha struggles to devise Budget for growth

Finance Minister Yashwant SinhaFinance Minister Yashwant Sinha faces the challenge of presenting a Budget to rev up economic growth at a time when demand is languishing while the government is short of funds to stimulate activity.

As Sinha puts the finishing touches to the Budget for 2002-03 (April-March), due to be presented to Parliament on February 28, he faces a depressingly familiar scenario.

Economic growth is sluggish, the fiscal deficit remains alarmingly high and investor confidence is at a low ebb.

Giving him some comfort and leeway to experiment with policy are the inflation rate, running at its lowest in decades, and a record level of foreign exchange reserves -- which provides a cushion against any unexpected adverse external development.

A strong increase in farming output could translate into higher demand for goods and services, helping an economic upturn.

Otherwise, policy options to kickstart economic activity in the near term are limited by the government's lack of funds.

"At this stage, there seems to be little Sinha can do other than hope for a cyclical upturn," said Pradeep Srivastava, chief economist for macro-economy and forecasting at the National Centre of Applied Economic Research.

Ambitious plans announced earlier this fiscal year to kickstart the economy through government spending did not take off due to a funds crunch - analysts estimate the government will end this year with a fiscal deficit over five per cent of GDP.

Large cuts in interest rates last year also failed to spark an expected revival in industrial activity.

While the Indian economy is relatively closed and depends largely on domestic factors to drive growth, a global slowdown does not help it.

An ongoing military standoff with Pakistan is also expected to keep investors cautious.

The results of local government elections in four states will also weigh on the government's mind. Exit polls have suggested that the Bharatiya Janata Party, which heads the central coalition, is set for a poor showing in the key state of Uttar Pradesh.

Analysts say a poor showing will not unseat the central coalition but it will restrict its freedom to make decisions.

SLUGGISH ECONOMY

GDP growth slumped to four per cent in 2000-01 (April-March) from 6.1 per cent a year earlier.

The economy is expected to grow 5.4 per cent this year, strong given the global slowdown but well short of the double digit growth analysts say is needed to cut poverty in India, where most of the billion-plus population earn less than a dollar a day.

"There is little Sinha can do. He announced so many reforms last year that he can't pull that rabbit from his hat this time," Srivastava said.

In the 2001-02 Budget, Sinha announced an ambitious range of reforms -- ranging from privatisation to reforms in the labour and power sectors and the legal system.

Industry and financial markets greeted that Budget with euphoria, heralding it as the harbinger of a second wave of economic reforms.

That heady feeling soon vanished as the government found itself caught up in a string of financial and political scandals which left it on the defensive for most of the year, with little time for economic decision-making.

"Given the slowdown, I expect the government to be pragmatic rather than ambitious," said B B Bhattacharya, head of the Institute of Economic Growth.

"They have to work first on stabilising growth before acceleration. The government will have to address the question of falling revenues and will have to bring in more services under the tax net."

FRESH REFORMS PUSH?

Some sections of industry are hoping that reforms announced unexpectedly earlier this month could herald a fresh round of economic liberalisation.

After months of indecision, the government stunned markets in the first week of February by pushing through stake sales in two major state-run firms and promised to dispose stakes in others.

In addition, it also finalised a voluntary job separations scheme to trim its bloated workforce and relaxed controls on the drug and farm sectors.

"There have been pressures but the necessary political will is evolving slowly. We expect a fresh push to reforms," said K K Nohria, president of Associated Chambers of Commerce and Industry.

Reuters

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