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'It's a daring Budget. A gamble worth taking'

R C Murthy

This is no dream Budget. For the first time in many years, the finance minister has framed a Union Budget without an eye on the stock market.

When the Bombay Stock Exchange Sensex plunged 3.87 per cent to 3562 on Thursday afternoon, Yashwant Sinha was unperturbed. Obviously, he has learnt the lesson. No pandering would help and no escape from harsh realities.

However, the market did smile again on Friday to rise by a hefty 3.27 per cent to 3670.

What was described dream as a dream Budget in the past year turned out a damp squib. The euphoria over, the market turned realistic as details sunk in.

The new Budget has shown little concern for the market, though. It has rubbed it the wrong way. A 5 per cent security surcharge on Income Tax and the dividend tax were slapped. The net effects of which would be lower corporate profits and reduced personal incomes.

But the Budget, nonetheless, is daring: it addresses fundamental issues and takes fewer gambles. Daring because of the Rs 127-billion proposed mobilisation. It takes the bull by its horns.

It proposes a steep 22 per cent increase in Plan outlay on power, 39 per cent rise on roads and highways and 23 per cent hike on railways.

Sinha proposes to tell the world with deeds that the second-generation reforms are on track. International investors are tired of hearing year after year the finance minister's pious intentions.

Service tax is extended to new areas. Full convertibility of the rupee is taken a step forward by allowing non-resident Indians to repatriate their funds in foreign currencies and to remit local dividends.

Lowering the interest rate structure facilitates this. The administered interest rates are down by 0.5 percentage point taking the total cut to 1.5 per cent.

Foreign firms are brought on par with domestic companies for tax purposes. Divestment of public enterprises, which began this year, is to be accelerated, foreign banks are to be given more leeway and investment concessions in special economic zones are to be made operational.

Global integration of the Indian economy is taken a step forward by cutting the peak customs duty to 30 per cent from 35 per cent and by setting the three-year timetable to reach international norms.

An across-the-board cut had to be abandoned keeping in view the recession-hit industries, which would be wiped out by external competition.

The state governments have a vital role in the next phase of reforms. Through a carrot-and-stick policy they are to be prodded into action in power sector reforms. A fund of Rs 140 billion is available as incentives for state-level reforms.

Apart from expanding and deepening the reforms, the Budget envisages a Rs 10-billion fund to boost investment in urban infrastructure, with a multiplier effect on job creation and to stimulate demand for core industries like cement and steel.

Despite this massive resource mobilisation, the fiscal deficit will be down by only 0.4 percentage point to 5.3 per cent of GDP. But, it is still unacceptably high. Look at the performance this year. The fiscal deficit is expected to be a runaway 5.7 per cent.

A bold step is cracking at the subsidies mountain: cooking gas cylinder price hiked by Rs 40 and kerosene will be dearer by Rs 1.50 per litre. The abolition of administered price mechanism for oil products is something international oil majors have been looking for.

Coupled with the statement on divestment, which is budgeted to accrue Rs 120 billion next year, against Rs 50 billion this year, the Budget is trying to set a new benchmark for industrial reforms.

Finance Secretary Vasudev talked about striking a fine balance between fiscal prudence and total spending. With armed forces operational eyeball-to-eyeball on the western border, one can't cringe on defence outlay. Even Rs 650 billion appears to be inadequate, though Sinha promised more if necessary.

The economy is in recession, export growth has plunged to an abysmal 3 per cent, and massive redundancies are the order of the day. Clearly, the economy is at the crossroads.

While inflation is low, there is a danger of its resurgence. The low inflation in the recent past is a result of cheaper imports. With export controls on agricultural products likely to be off soon, the situation would have to be watched carefully so that the delicate balance is not upset.

The situation would have to be monitored from now on to see as to how the economy would respond to the incentives being offered and the adverse impact of the high fiscal deficit would have. Certainly, it's a gamble. But worth taking.

Journalist R C Murthy had senior editorial assignments at the Business Standard and was a correspondent of the Financial Times, London. He also writes for several financial journals.

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