Budget Commentary/Dr Jay Dubashi
Another roll of the die
Yashwant Sinha does not believe his Budget is a gamble. It is, and one likely to fail.
The great Napoleon Bonaparte used to ask only one question of his generals: is he lucky? The same goes for those who look after a nation's finances. Whether it is wars or budgets, they are essentially gambles of one kind or another. If you are lucky, you win. If you are unlucky, you lose.
Already it is said there are so many imponderables in Yashwant Sinha's Union Budget for 1998-99 that he has already lost the game. It is true his Budget has not made much of a splash, but that is not such a bad thing. P Chidambaram's Budget last year made a splash, and look what happened.
Perhaps the most surprising thing about Sinha's Budget is his belief it is not much of a gamble. There are no ifs and buts in the Budget. He does not mention, except in passing, the nuclear tests and the economic sanctions India may have to face. He does not think growth will be a big problem once he launches the big investment programme he has budgeted for. Exports or balance of payments are not a problem either: he does not mention them. Nor does he say anything about the capital market or the falling rupee.
He does not given an idea of what industrial growth is going to be like and whether inflation will be a problem. The finance minister is so self-absorbed in his little schemes and programmes; he either does not see the big picture or does not think it important.
This is a big mistake. If the big picture gets out of focus, the little bits in the Budget can get totally out of line. It is to his credit that he seems to have thought of everyone, from those likely to be thrown out of jobs when public sector units are denationalised to farmers who will now be given kisan credit cards. There is something for small industry and more than something -- a big bonus in the form of an eight per cent surcharge on imports -- for the Bombay Club.
Expenditure on infrastructure will be stepped up by 30 per cent, a hefty increase at a time when there is not much cash in the kitty. And there will be higher outlays in the rural sector, the most neglected sector in the country and one untouched by the last seven years of so-called liberalisation.
Sinha has continued with most of the features introduced by earlier finance ministers and, despite pre-Budget rumours to the contrary, has not hiked income tax or corporate tax rates. The bulk of the additional revenue he will be collecting will be from the new surcharge on imports, the so-called swadeshi
surcharge, and hikes in excise duties on mostly consumer goods.
He will net 20 per cent more in the way of customs duties and 18 per cent through the swadeshi surcharge. He will collect Rs 83 billion more than last year under these heads. Last year the government collected Rs 150 billion less.
Chidambaram slashed taxes but hoped to reach a gross domestic product growth rate of eight per cent and industrial growth rate of 10 per cent. Sinha is hiking taxes, but also hopes to reach the same high levels of growth in GDP as well as industry. Both finance ministers have the same set of advisors, whom we see on television holding forth after every Budget. Has the Indian economy reached nirvana in which taxes make no difference and the economy keeps growing whether you hike or reduce them?
If this is what Sinha has been advised, he is taking on a bigger gamble than I suspected. Either they have pulled a fast one on him or he has decided, what the heck, let me take a chance and see if it works. After all, I need the money and where can I get it other than through higher taxes?
I do not think his gamble is going to pay off, for the same reason Chidambaram's dream Budget did not work out last year. For apart from taxes, there are other uncertainties built into the system. One is political uncertainty and the other is economic uncertainty following sanctions. This double whammy will be at work in the next few months and can play havoc with the Budget.
A simple calculation indicates the finance ministry is betting on a nominal GDP growth of around 15 per cent, against only 10 per cent last year. This is made up of real GDP growth and inflation, leave or take a few decimal points.
Sinha must have this kind of nominal GDP growth to collect the kind of revenue he has budgeted money for. If there is no money in the economy, there will be no money to pay taxes. That is the reason the government's calculations went awry last year. The GDP growth rate slumped to five per cent -- against 7.5 per cent the year before -- and there was a drop of Rs 150 billion in tax collections. This is a heavy drop and raised the fiscal deficit to over six per cent, against a budgeted figure of 4.5 per cent.
The same thing can happen again, because there is nothing in the Budget to stimulate industry.
On the other hand, the swadeshi surcharge will make industry lazy and complacent. Industry will pass on the surcharge to the consumer. If the consumer refuses to bite, as he did last year, there will be a big slump in industry and consequently a big fall in real GDP growth rate. Sinha thinks it should grow by eight per cent. It might get stuck at six per cent, only one percentage point more than last year.
Now look at the export side, something the finance ministry pundits seem to have overlooked. The external environment is anything but encouraging. If there are sanctions, it will be even less so. Agreed, we should not make too much of sanctions and be prepared to tighten belts. But there is no such message in the Budget. The Budget makes no call to patriotic Indians to prepare themselves for the coming challenge. This is surprising coming from the finance minister of a party that is almost synonymous with nationalism.
If the sanctions lead to a slowdown in foreign funds, the rupee will be under pressure, and the cost of imports will go up. Indian industry is extremely sensitive to imports. If imports become costly, apart from the additional costs following the swadeshi surcharge, it will have a negative impact on imports as well as industrial production.
This is precisely what happened last year and industrial activity slumped to four per cent, perhaps the lowest in a decade. Last year, the fiscal deficit climbed to 6.1 per cent, it might go up to 6.5 per cent this year. And as every student of economics knows, larger fiscal deficits means more inflation which, as some pundit have predicted, may rise as high as 10 or 12 per cent this year.
The finance minister has the right intentions: more money for the rural sector and small industry, a level playing field for Indian industry, more funds for infrastructure and a welcome mat to nonresident Indians as well as foreign investors. But there is also the background of gnawing political and economic uncertainties and their likely negative impact on investment and growth. The two may cancel each other out, as they did last year, making mincemeat of the dream Budget.
What is really absent in the Budget is a clarion call to the nation, if not from Sinha then from the prime minister himself to meet the challenges of the times. A call, in other words, to do what the country expects its citizens to do, not wait for the government to tell them what to do. It should have been a people's Budget, not a Sinha Budget.
Sinhas and Chidambarams come and go. It is the people who, through hard work and enterprise, really make -- and unmake -- a nation's Budget.
Dr Jay Dubashi, the wellknown economist and columnist, is a former member of the Bharatiya Janata Party's national executive. He was tipped to be finance minister when the BJP came into power.