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|October 15, 1999||
Sinha lifts the veil on the economy, finds it inching toward internal debt trap
Finance Minister Yashwant Sinha has said that India might face an internal debt trap as interest burden is rising.
Internal debt is estimated to be Rs 750 billion. Sinha said his first priority would be to control government expenditure and added that fresh taxation to narrow the fiscal deficit would be his last priority.
He was talking to mediapersons on the sidelines of the Confederation of Indian Industry National Council meeting in New Delhi.
''We are on the verge of an internal debt trap and all this discussion of improving the economy becomes meaningless if we continue to pay as much as Rs 900 billion or Rs 1 trillion for interest repayments alone... My first effort will be to reduce expenditure," Sinha said. "I am looking at taxation to raise additional resources absolutely as the last resort."
Sinha's statement sent shock waves through the stock markets. The BSE Sensex crashed by 189 points today.
Reining in fiscal deficit, inflation
Sinha had set a target of 4 per cent for fiscal deficit in the current financial year in his 1999-2000 Budget, down from 4.5 per cent in the previous year.
However, the Kargil conflict with Pakistan has upset early calculations. Worse, industrial slowdown is suspected to have affected tax receipts.
"The feel-good factor is largely back. There has been some upturn in industrial production, modest recovery in exports. The challenge will be to sustain this recovery," Sinha said.
On Thursday, Sinha said all efforts would be made to keep prices under check and a mid-term fiscal plan will be drawn up to bring down fiscal deficit to two per cent.
Sinha said the prevailing level of fiscal deficit was a matter of concern and said his ministry will come out with a plan to bring it down to two per cent.
Sinha, while assuring steps to contain inflation, said the question of reducing subsidy on kerosene and LPG would be carefullly gone into in the context of the deficit in the oil pool account.
Reforms and industrial growth
Year-on-year industrial growth in the five months to August was six per cent. According to government sources, industrial growth of nine per cent in the current financial year is possible.
Sinha disclosed that he had started the process of drafting a comprehensive document on reforms in all sectors of the economy.
Stress on economic legistations
Sinha said that a legislation for competition in the economy is also under consideration. Sinha had recently met renowned competition expert Prof Michael Porter of the Harvard University who suggested a National Innovation Fund and strengthening of venture capital for knowledge-based industries.
He was optimistic that by winter session of Parliament, pending economic bills would be passed.
Sinha said insurance continues to be a top priority. The other bills awaiting passage are related to money laundering, securities and contract regulation, (which would permit derivative trading) and the Sick Companies Act.
No review of diesel price hike
Sinha ruled out any review of the recent increase in diesel prices. Hard decisions will need to be taken for keeping a check on the fiscal situation. ''There are no soft options and the time has come for hard decisions.''
There have been protests against the diesel price hike from truckers' associations and others. N Chandrababu Naidu, Andhra Pradesh chief minister and Telugu Desam Party president, had said in a television interview that important decisions (like the diesel price hike) should be taken only after due consultations and discussions with the constituents of the ruling alliance.
The finance minister said the diesel price hike was necessitated by the fact that the previous government had pegged it to international prices. These were to be revised every two months. However, as the Bharatiya Janata Party was preoccupied with the elections it was unable to hike the prices earlier.
Mid-course taxes would be the last resort
Whether there will be a Kargil tax, he said, ''Can't we forget the Kargil tax?''
Sinha said any mid-course levy of taxes would be the last resort and he would like to restore the health of public finance through cut in government expenditure and meeting the Rs 100 billion target of public sector disinvestment in the current financial year.
''It is only after I have exhausted these means that we will think of additional resource mobilisation,'' he said.
Sinha said he is hopeful of meeting the disinvestment target through innovative, transparent and market-friendly means. ''I know we have already lost time but I am looking at one or two big ticket suggestions to be placed before the Disinvestment Committee of the Cabinet and the prime minister.''
He made it clear that the innovative ways of disinvestment would not mean the cross-holdings between different public sector companies.
So far as the revenue-raising budget targets are concerned, excise collection is on the dot, customs as also the personal income tax are near the target while there is some deficit in corporate taxes.
''But September has been good for corporate taxes. The revenue in this month has been higher than the same month last year. If the trend continues, we should be close to the target by March 2000.''
Second generation reforms
Sinha said that he and the prime minister are keen to push forward the second generation reforms. The direction and sequencing of these reforms will be put together in a discussion paper and placed before Parliament in winter session or at the most Budget Session.
''But there is no escape from reforms as increasingly we have to meet global challenges right here within the country.'' He indicated that meeting the basic amenities of common people, especially in rural areas and improving the financial sector, would be at the core of next stage of economic reforms.
The government will try to contain market borrowings within the budgeted level as the country cannot afford on borrowed money year after year.
'There's life beyond the BSE, FIs, FDI'
Sinha reminded senior industrialists that ''there is life beyond the Bombay Stock Exchange, financial institutions and foreign direct investments. While these are important for the national economy, the economic agenda should include the basic needs for most people like water, roads, electricity, education and hospitals.''
''There are places which do not even have primary schools,''said Sinha, who won elections from Hazaribagh, a backward area in Bihar. He felt sorry that being a finance minister he could not even discuss the economic issues like the BSE index and capital adequacy ratio with the voters. For them, these things have no meaning as long as they live in poverty.
''The reality in urban areas is no different as far as basic amenities are concerned,'' he said, emphasising that the message should go clear that the government would not be merely concerned with neon signs, capital markets and FIIs.
Banks' contempt from reality: Kisan Credit Cards
At the ground level, even the best of instructions are distorted. He gave examples of banks in Bihar where the customers have to wait for days to withdraw money after presenting the cheques.
Sinha narrated how the Kisan Credit Card Scheme proved to be a big flop because he found that the bankers were insisting on Rs 10,000 deposit from farmers for this facility. ''Why will a farmer need a credit card if he has Rs 10,000?''
Earlier, CII president Rahul Bajaj presented a 13-point memorandum for the new government. He said there is a spirit of entrepreneurship among Indians even amid troubled times. He hoped the country will play its legitimate role on the global horizon in the coming decade.
Whiplashing ministries to cut expenditure
Sinha today took the first step to reduce fiscal deficit after assuming office by directing various ministries to ensure a strict ten per cent expenditure cut and gradual phasing out of subsidies.
At a meeting with financial advisers and financial commissioners of various ministries, Sinha pointed out that instructions had been issued in August last relating to cutting non-plan, non-salary expenditure. This should now be applied in all earnest and reflected in the revised estimates of various ministries.
Sinha said there are some added items of expenditure which are inescapable, the requirements of such funds should be met out of the savings in other sectors.
The finance minister said user charges levied by various departments which are of a service nature, the attempt should be to phase out implicit subsidies.
In the case of weak public sector units dependent on budgetary support, a scheme needs to be devised to reduce their dependence on such support.
Latest figures show an alarming rise in the level of fiscal deficit as also market borowings.
Sinha emphasised the need for zero-based budgeting in each ministry, which he said should be strictly complied with. This exercise should be completed by December 31, 1999.
C M Vasudev, secretary, expenditure, will hold meetings with various financial advisers of various ministries beginning October 27. After the exercise, these estimates will be presented to Sinha by November 20.
Experts say one of the effective ways to cut the galloping fiscal deficit will be a reduction in unproductive expenditure and cut the flab wherever possible.
In August the revenue deficit showed an upward trend, which was a reversal of the earlier figures. This has been attributed by finance ministry officials to effective expenditure control measures.
In reply to a question as to whether the 70-member ministry was conducive to expenditure control, Sinha said this would not come in the way of the government initiating steps aimed at exercising expenditure control.
'Govt won't recapitalise banks'
Among other steps his government would take are strict control on expenditure, implementation of financial sector reforms as outlined by the M Narasimhan Committee and more recently the Verma Committee report on weak banks, introduction of the insurance and other economic bills like the Foreign Exchange Management Bill on a priority basis in the winter session of Parliament, a paper on second generation of reforms entailing sectors such as the rural economy and international trade.
Sinha said it would not be possible for the government to recapitalise the banks from its resources.
Expressing difficulties for the government to raise resources for the bank recapitalisation, Sinha said that the best course for strengthening banks would be reducing the government holding through disinvestment.
"There is no way we can find resources. There are no resources available in the budget,'' he said. Sinha said his personal preference would be to implement the Narasimhan Committee Report which suggested government disinvestment even below 50 per cent.
The Verma Committee Report on weak banks had recommended a recapitalisation to the extent of Rs 55 billion subject to conditions.
At least three nationalised banks desperately need recapitalisation.
Pension funds for stock markets?
On the question of allowing pension funds and individual foreign investors into the stock markets, Sinha said requisite steps were being taken in this direction and an enabling legislation would be provided for.
Asked whether there will be a supplementary budget, he said there was a tradition of supplementary demands and these would be presented in due course.
Sinha claimed that there was a sea change in the economic situation since he first took over. The economy is on a much stronger footing today than it was 18 months ago, he said.
Politics and economics
Sinha was quizzed about the possible hurdles to reform programme from various constitutents of the National Democratic Alliance. He said these objectives have been set in the NDA manifesto.
Sinha said his government was committed to enacting the Fiscal Responsibility Act. He was particularly unhappy about state finances.
Sinha said he was confident of achieving a seven per cent economic growth and would work towards a fiscal deficit of four per cent of the GDP.
He, however, expressed the dilemma that keeping prices low, especially administered prices, would impinge adversely on the fiscal defict. It was thus like a ''double-edged sword.''
The finance minister said the government would invest more on health and education, especially primary education and other social sectors.
Asked to spell the 'hard decisions' which the prime minister had referred to, Sinha said he was not in a position to talk about these and would hold consultations in this regad with Vajpayee and others.
The paper to be brought out by his ministry on the second generation reforms would be a road map involving various segments of the economy, he said.
To a question on the interest rates, he said it was in the realm of monetary policy and under the control of the central bank. Sinha said he was directly taking care of the fiscal side of it.
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