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October 11, 1999


Industry reconciles to imminent tough times

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Our Business Correspondent in New Delhi

With both Atal Behari Vajpayee and Yashwant Sinha hinting at some tough policy measures, industry is getting over the initial euphoria over the prospect of political stability and settling down to face some unpleasant news.

Industry leaders feel it is too early to comment but admit some "belt-tightening" is required to tide over the unsustainable fiscal deficit. As industry is confident that Sinha will be back at the North Block to man the finance ministry, it feels that several of the 12 pending bills will be passed at the earliest.

With Sinha hinting that a Kargil levy is unlikely, industry watchers are of the opinion that the tax structure could be altered.

Says a consumer electronics industry source: “Industry does not mind a one-time Kargil levy if it is needed. But now we fear that the taxes might be increased. We wish the government would rather not hike the corporate taxes as industry is still going through the recovery phase. We agree with the government that we need a medium-term strategy that will bring down the fiscal deficit to about two per cent in the next three years."

However, Sinha and Vajpayee have made it clear that the government has no soft options. For the problems are plenty. The fiscal deficit at the end of August was rising by 26.2 per cent as compared to the targeted rate of 6.9 per cent. This is expected because expenditure was growing at 17 per cent as compared to the target rate of 12.2 per cent and tax revenues (at the end of September) were rising at 13.3 per cent as compared to the required rate of 18.9 per cent. The expenditures will go up further on account of election expenses (Rs 10 billion), dearness allowance to government employees (Rs 13.19 billion) and enhanced food subsidies.

The common man too fears a further increase in his personal taxes. Says Jaydeep Ghosh, an economics professor at Delhi University: “With the kind of money that the country had to spend on Kargil, it would not be surprising if the man on the street ultimately ends up paying for it. Last year, Sinha gave us a happy budget without increasing personal taxes. He even restructured the overall tax structure making some commodities even cheaper in the market. But now, with Vajpayee himself hinting that there could be tough measures, the common man is apprehensive that the government could punch holes in his wallet .”

The government, he says, will have to take some tough measures for additional resource mobilisation. These measures, especially if they are additional tax levies, will not be popular with the masses nor in the stock market.

However, an alternative is to speed up the divestment process. As the industry chambers have been demanding for quite sometime now, the government will have to bring down its stake to less than 50 per cent and it will have to supplement this move with privatisation. But time could be a constraint here with the international markets expected to close by end-November this year in view of the Y2K problem.

Meanwhile, the government has reportedly decided to go ahead with the recommendations of the Standing Committee on Finance and cap foreign equity in insurance at 26 per cent. The bill is slated to be moved in the short session of Parliament that is likely to be convened after the National Democratic Alliance takes charge at the Centre.

Earlier, the government had envisaged a foreign equity cap of 40 per cent comprising 26 per cent stake to be held by foreign promoters and 14 per cent by foreign institutional investors, Non Resident Indians and Overseas Corporate Bodies. Now, the 14 per cent stake earmarked for FIIs, NRIs and OCBs has reportedly been scrapped.

The mood is upbeat on the possibility of the government introducing six other bills, long pending before the Lok Sabha, chief among them being the Prevention of Money Laundering Bill and the Foreign Exchange Management Bill, announced in the last budget.

The new government is also expected to initiate privatisation of leading state-run banks, allowing government holding in them to be reduced below 51 per cent through an amendment to the Banking Regulations Act. It is also expected to announce overhaul plans for weak banks and embark, for the first time, wide-ranging amendment of laws governing the banking sector, aimed particularly at facilitating more effective recovery of loans.

These are moves that industry has been demanding for a long time, especially reforms in the banking sector and disinvestiment accompanied by privatisation.


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