Money > Budget > Budget News & Analysis FEBRUARY 19, 2002 | 19:15 IST    rediff.com 


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Budget to weave a strategy for economic revival

Gurdip Singh

Finance Minister Yashwant Sinha will be spinning out in the Union Budget 2002-03 a strategy to pull the economy out of its current recessionary phase.

Sinha plans to step up public investment in infrastructure, thereby giving a fillip to private investment and thus putting the economy on a higher growth trajectory. The aim is to stimulate aggregate demand through various means, informed sources say.

The Budget will provide for more spending on power, roads and railways while giving incentives to promote private investment in infrastructure areas like housing.

There is a view among economists that the finance minister may lower duties on items of mass-consumption to boost demand.

The industry has been telling Sinha that this is likely to be his last opportunity to rein-in the fiscal deficit and spur growth before 2004's general elections hijack the growth agenda.

According to industry leaders, the 2003-04 Budget was likely to be made with an eye' on the following year's general elections. This implies that instead of controlling non-productive expenses, the government would then take populist measures for capturing votes.

Sinha himself has stated that he was not too fetishist about the level of fiscal-deficit if it spurred growth.

''I am willing to finance projects which have high-productivity.''

This, however, does not mean that he would overlook fiscal prudence. What it means is bringing about more sustainable balance in government revenues and expenditure. Reducing the revenue gap holds the key to bringing down the fiscal deficit.

The Budget is likely to lay greater emphasis on all sectors related to infrastructure with the delivery part being handed over to the states. It is pertinent to point out that Sinha's efforts to kickstart the economy via the central sector by allocating Rs 36 billion at the time of revised estimates failed to produce the desired results.

Taking lessons from this experience, informed sources say, there is every likelihood of Sinha depending on the states for pushing developmental projects.

The Budget is likely to have a 'special window' to address the problems relating to PSUs. For this purpose, the government is toying with the concept of a special purpose vehicle to be set up to address the problem of winding-up unviable PSUs and providing finances for reviving PSUs found viable.

An infrastructure development fund is likely to be set up to encourage the corporate houses to take up infrastructure-related projects.

Financial institutions could be asked to pool funds to create a corpus for idf with a team of representatives of the central government managing this facility.

The rationale for the fund is the poor corporate response in sectors like power and roads and the desire to broadbase health facilities.

Indications are that to encourage states further carry out reforms, a structural adjustment facility could be created.

Devolution of funds from this facility will be linked to the performance of states in certain desired sectors. The thrust areas will be civic amenities, irrigation and rural connectivity.

For this purpose, states could be asked to undertake legislative changes so as to remove bottlenecks in the way of private sector participation. The Centre wants the states to have a fresh look at the urban land ceiling act and introduce laws aimed at promoting construction activity.

Another major area likely to be addressed in the Budget is the issue of food management in which the states will be required to take-over procurement through private agencies. Experts are even talking about the Food Corporation of India being split and its major role of procurement handed over to the states.

Experts say not much attention has gone into expenditure reform over the years. Thus the pressure to raise large additional resources, mainly through borrowings, remains high to bridge the revenue gap year after year. Low growth of the economy, more noticeable in the current year, also depressed tax receipts. Fiscal deficit in the current year may be between five and 5.5 per cent against the targetted 4.7 per cent of GDP.

Unlike the past four years, Sinha will be presenting his fifth Budget in a grim situation. The slowdown in the economy has never been so severe during the earlier years.

Apart from the large fiscal deficit and tax collections falling short by more than Rs 100 billion, export growth in real terms is stagnant, non-oil imports are touching a new low, industrial growth has slowed to a bare two per cent and there are serious financial sector problems.

Industry leaders argue that this should force Sinha to now act and take tough decisions relating to second generation reforms.

Inflation at about two per cent is at an all time low, forex reserves are worth nearly $50 billion, global oil prices are low and foodstocks, at 60 million tonnes, are more than sufficient.

The Budget is likely to introduce wide-ranging tax policy changes. The finance minister is in favour of a stable tax regime.

He is, however, likely to do away with several exemptions and widen the tax base, besides readjusting income slabs to garner increased revenues, sources say.

The service tax will be extended to even more categories as a source of additional revenue.

The apex chambers have put forward a slew of suggestions, including the lowering of corporate tax to 30 per cent, reintroduction of investment-allowance and a large depreciation allowance or development rebate.

Sinha is likely to go towards making the tax-treatment more friendly for foreign investors.

The finance minister himself has indicated that the budget will give 'a new thrust to agriculture'.

"When agriculture does well, it promotes the impulse for continued overall growth in future. Growth rate in agriculture during 1998-99 provided the impetus for fairly decent growth during 1999-2000. The Budget will focus on agriculture'', Sinha has told an audience earlier.

Industry experts say the economy has not benefitted fully from the vast rural market and one of the limiting factors in investors realising the full potential of their investments is the lack of physical infrastructure.

The ongoing recession, to some extent, can be tackled by opening up the rural market to consumer goods, but this requires creation of incomes and retail-structures to tap them.

The agriculture sector appears to have done better this year at an expected three per cent growth after two successive years of negative growth. Public investment in the rural sector needs to be substantially increased in real terms.

Expenditure on defence and law and order will certainly go up in the prevailing circumstances, experts say. Defence expenditure of Rs 620 billion is likely to be increased, particularly for modernisation and upgradation of the armed forces.

Captains of the industry say the heightened tensions on the borders would have a debilitating impact on the economy. Scarce resources, which otherwise could well be utilised to augment capital investments in various areas, are being diverted towards defence spending.

The economy, in the slowdown mode, could deteriorate further and nullify the positive impact of a forward-looking Budget.

Experts say the uncertainty created by the current situation is bound to cause a further set-back to business confidence which, in turn, will affect investment sentiment as investors defer decisions relating to new projects, thus reducing private-spending.

The stock market, too, has been affected with the shelving of initial public offerings and foreign institutional investors lowering their exposure to Indian stocks.

A loss of business confidence, arising out of this situation, would cause capital to flow out of the country resulting in exchange rate depreciation.

Foreign direct investment could also take a back-seat. The total impact on the industry could be significant, they add.

UNI

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