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January 29, 2001
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Sinha likely to pass the revival key to Jalan

NetScribes/R Radhakrishnan

The domestic industry's hopes -- that the economic slowdown would have brought forth a bouquet of goodies in the forthcoming Union Budget for it -- are likely to be belied.

Economists opine that this time around, the Union Finance Minister Yashwant Sinha will pass the responsibility of kick-starting the economy to the Reserve Bank Governor Bimal Jalan.

"The finance minister has no leeway on the fiscal policy front, considering that the revenue targets are slipping. The debt-to-GDP ratio is also increasing, putting more pressure on the fiscal balance. Kick-starting the economy would mean spending more on planned and developmental expenditure, which would result in a higher fiscal deficit," said Sanjit Singh, senior analyst with ICICI Securities.

"The government can ill afford this as this could force international rating agencies to downgrade the country's outlook," he said.

Last year, the government's failure to rein in the fiscal deficit had prompted Standard & Poors' to downgrade the country's outlook.

The government, even if it wishes, cannot afford to lower income tax rates to boost corporate profits and industrial activity. The reason is that the revenue mop-up from indirect tax collections is way below the target.

In the first nine months of current fiscal, total tax collections have grown by only 14 per cent, comparable to the target of 18 per cent. Only, income tax collections have posted a healthy growth of 37 per cent, compared to the targeted level of 18 per cent, due to higher advance tax submissions.

But total tax collections are likely to lag further in the last quarter of the fiscal, as is evident from the growth rate of 0.04 per cent registered in December.

The negative growth rate in customs collection due to lower non-oil imports has also confirmed that the industrial slowdown is gathering pace.

Even a cut in import tariffs is unlikely due to the threat of dumping from China. The decline in international crude prices and softening global prices of other commodities have led to lower customs collections in April-December 2000.

Has the Gujarat quake altered budgetary calculations in any manner? "Not really. The damages are not yet estimated. The government would try to bridge it through public collections and the government could levy a tax surcharge to pool in additional resources for quake relief," said Madan Sabnavis, chief economist at ICICI.

So what are the options available before the finance minister to revive the economic activity and cut the deficit?

"There is nothing much that finance minister can do in this budget. This budget could look at an aggressive divestment target and cut excise duty on select commodities. But the impact will not be substantial enough," Singh said.

The cement and auto sectors could be prime candidates for the excise sops, given that a revival in these sectors could impact other sectors positively as well.

"A cut in the plan expenditure to bridge the deficit is also ruled out, given that the government has already reduced spending on projects," Sabnavis said.

Given that the government doesn't have much elbow room to present a better picture, it is likely to try and maintain the fiscal deficit at its current level, added Singh.

"The government would leave it to the monetary policy to tackle the situation, or it could be a mix of fiscal and monetary measures," Singh said.

"Going by the recent global developments of aligning domestic interest rate policy with the international rates would mean an easier interest rate regime in India too. The decision solely rests with the RBI. Lower interest rates would definitely help in kick-starting the economy," he added.

Past studies show a high correlation between a reduction in the outgo towards equated monthly instalments and a spurt in consumer buying, and this could come about only from a rate cut.

Over to the RBI Governor.


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