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Union Budget tops policy test, readies for politics

The Union Budget, hailed by economists for its simplicity, now faces its most crucial test as parliamentarians debate its fate against a backdrop of sectarian riots.

Unveiled last week, Finance Minister Yashwant Sinha's Budget contained very few hard-hitting reforms, offered no panacea for flagging economic growth and did little to curb the fiscal deficit that puts the country's rating below investment grade.

Inhibited by poor government finances and a frail industry, Sinha chose instead to rationalise subsidies, widen the tax base and make a feeble attempt at cutting the mammoth bureaucracy.

"One of Sinha's hands is tied behind his back, and the coalition government rather limits his potential to deliver," said Arjun Mittal, economist with American Express, London.

"So, he treaded a fine line between propping up the economy, not rocking too many boats and doing some piecemeal reforms."

Parliament began a session on Thursday to debate Sinha's fifth Budget at a time when his ruling Bharatiya Janata Party is facing its worst crisis since assuming office in 1999, its position weakened by the recent losses in provincial elections.

But it was disrupted soon by an uproar over last week's bloody riots in Gujarat, sparked by the long-running dispute over the construction of a temple at a disputed site in Ayodhya, which killed more than 600 people.

Still, analysts say the Budget may not face much resistance in the fractured Lok Sabha because the focus has shifted to other issues.

"The opposition will be too busy with the Ayodhya temple issue," said T K Bhaumik, economist with the Delhi-based Confederation of Indian Industry.

MARKETS LIKED THE BUDGET

Bhaumik said the reaction of capital markets to the Budget would also work in Sinha's favour.

Stock and bond markets, first unhappy with the Budget which changed the way dividend is taxed and rather boldly floated rates on state-run small savings, sprung back later.

Economists lauded Sinha's honesty in admitting the fiscal deficit was hard to control as well as his realistic estimate of a 5.3 per cent of GDP deficit for 2002-03 (April-March).

They said he has given finishing touches to a reforms agenda while simplifying the complex structure of duties and taxes.

And, importantly, that it recognised provincial governments have not implemented key reforms in sectors like power and food.

"There is a clear political perception behind this, that the state governments will not undertake reforms, nor will coalition partners allow it," said Prem Shankar Jha, a Delhi-based analyst.

"So Sinha had to fall back on the old strategy of cutting subsidies to raise revenues and control expenditure."

"ROLLBACK SINHA" MAY NOT YIELD

Sinha, who has in the past rolled back or reversed fertiliser subsidies and custom duty hikes in previous Budget proposals, may also be less willing this time to give in to opposition parties griping over the hike in fertiliser costs and taxes.

"There will be politicians yelling on behalf of farmers and consumers, but any concessions may be very minor," said Jha.

He said farmers get compensated for the higher cost of fertilisers because the government buys their produce at even higher prices, and consumers would pay more for cooking gas but will be compensated by recent reductions in petrol prices.

At the risk of displeasing millions, India needs to reduce subsidies which comprise almost a third of the fiscal deficit.

Economists also justified the removal of tax breaks on savings for individuals. They said only 2.5 per cent of India's one-billion population pay taxes, savings form merely 24 per cent of GDP, and government borrowings eat up 10 per cent of those.

"Tax breaks in the past have not spurred much consumption or investment, so Sinha decided he will undertake that expenditure," said Sanjay Mathur, economist with UBS Warburg, Singapore.

Indeed, Sinha increased planned outlays on infrastructure, albeit marginally.

Reuters

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