A budget for industry and growth

New Delhi, March 2, 2001

The industry seems ecstatic about the Union Budget for 2001-02 with most industry leaders giving it a score of nine out of ten. This reasonably balanced and forward looking budget has come at a time when the economic conditions in the country are not something to be happy about.

The Economic Survey released a few days before the Finance Minister rose to present the Union Budget for 2001-02 had given sufficient indication that there is not much to expect as windfalls from the Budget. The precarious state of the finances of the government can best be appreciated from the fact that 69 per cent of its tax revenue goes for interest payments.

The hands of the Finance Minister were tied. There were talks about downsizing the government to cut expenses. But savings out of it are peanuts although that is needed for different reasons - to improve efficiency and change the image of the government machinery. That is but a different matter. The subsidies have to be reduced but cannot be done in one sweep. More than pure economic logic, these are political matters involving diverse socio-economic forces. Therefore, Sinha had to tread carefully and intelligently. He reduced administered interest rates on small savings by 1-1.5 per cent. This will trigger off a lending rate cut immediately. More than what the industry and trade can gain out of it, the government expenses will be reduced by large sums in one stroke.

There were not too many options for the government to cut expenditure.

The Finance Minister has expressed all his anxiety about the rising fiscal and revenue deficits of the Central government. He has announced that both as per cent of the GDP have remained within his target. But that is not good enough - for the government as well as for the country if the expenditure is in unproductive areas. There were not too many means to raise tax revenue by either increasing the tax rates or by rationalising those. The end result of the changes proposed for both direct and indirect taxes could perhaps not add any extra revenue for the government if there is no growth in the economy.

Therefore, he had to depend on growth and look for measures to achieve that. It is interesting to see that his growth-oriented budget is dependent on growth itself. This is exactly the area where the calculations of the Finance Minister may go haywire at the end of the year. This is but the other side of optimism and looking at the worst case scenario. But fears in the economy are not always unrealistic and speculative.

The Economic Survey did not project an economic scenario to be comfortable with in the days to come.
 
After the economic slump in 1997-98, the Gross Domestic Product (GDP) growth rate recovered to 6.6 per cent in 1998-99 and then fell slightly to 6.4 per cent next year. The advance estimates put the 2000-01 growth rate at 6 percent. Past records show that this figure will undergo substantial modification over time and one is not sure what it will end up with. Only a rate above 7 per cent can pull the sagging economy up.
 
The Survey says that the gross domestic investment rate (as a percentage of the GDP) in India grew marginally from 23 in 1998-99 to 23.3 per cent in 1999-00. During the same period the gross domestic savings rate (as a percentage of the GDP) increased from 22 to 22.3. The small rise notwithstanding, the figures in both the years were lower than those in the previous and are close to the corresponding figures for 1991-92, the real recession year in the nineties when the GDP growth rate had collapsed to a meager 1.3 per cent. The real gross fixed capital formation as a percentage of the GDP showed a little improvement from 23.5 per cent in 1998-99 to 23.8 per cent next year.

But for 2000-01, there was no clear trend. The Survey says that on the one hand there has been a rising flow of funds for investment into the economy. Increases have been recorded in  disbursement of funds made by the All India Financial Institutions. Foreign direct investments have also grown. On the other hand, the Survey shows drop in domestic production and import of capital goods.

The government shows some pessimism in regards to the investment scenario in the country in the pages of the Survey saying that "there may not be any significant recovery of investment in 2000-01". The Survey also points out that although the growth in demand for consumer durables and non-durables has been significant, the poor state of demand for capital goods and intermediates indicate weak investment demand. The optimism shown by the Survey in regards to the disbursement and sanction of the FIs  for project funding may also be misplaced as the same period had seen a sharp slowdown in the amount of money mobilised from the capital market. Although the commercial banks credit to the industrial sector has increased, that is used mostly as working capital.

The Finance Minister knew it all. His major focus naturally was to create an investment climate by reducing costs of capital and bringing in better infrastructure for the industry. With the prices of manufactured products growing only slowly, 3 to 4 per cent, according to the estimates of NCAER, the real interest rate for the industry has been on the up for quite some time now. The new drive will work for reduction in the real interest rate and make investments more attractive. By de-reservation and easing out credit flow, the government plans to boost up investment in the small scale sector. All these have come on top of the priorities the FM has set to investment in infrastructure.

There is little hope for the domestic private consumption demand to rise in the immediate. The real consumption growth rate decelerated in 1999-00 to 5.8 per cent from 7.9 per cent in the previous year. Therefore, for growth, the Finance Minister could not avoid those steps that could bring consumption demand back. He has reduced excise duty by 8 per cent to boost up the sagging demand for automobiles. His fiscal measures like reduction in import duties will boost the computer industry currently under some strain. The processed food will also get more takers. However, edible oil will become more expensive with increased import duty. Postal services will turn a little more expensive as much as PDS sugar. Import duty on cement has also been dropped perhaps to counter the oligopoly pricing of cement in the market.

The Finance minister has also relied on increasing demand from the rural sector to boost up the overall consumption demand in the economy. A host of measures have been proposed to support growth in agriculture that has stagnated in the last two years.

By scrapping the surcharge on income tax (except for the one of 2 per cent towards Gujarat earthquake relief) the Finance Minister is providing more disposable income in the hands of the people for larger consumption and with  the same stroke more funds for investment with the corporates.

The Finance Minister has made his intention clear by another dose of reforms. More than what he has actually done this time, the Minister has bared the government agenda for the time to come. More reforms are to follow for sure. If not anything the country with the new look economic policy should attract more foreign direct investment. He has placed before the nation the road map for elimination of the administrative price mechanism for petroleum products and drugs and retention price scheme for fertilisers. The debt market has gradually been opened up for the private sector and with the removal of restrictions on foreign investment by Indian companies in select areas, the government has taken one more step towards convertibility of the rupee on capital account.

The Survey has shown that exports are growing at good pace. After a negative growth in dollar denominated exports at - 5.1 per cent in 1998-99, the rate improved to 13.2 per cent in 1999-00 and till December, 2000, the figure stood at a huge 20.4 per cent.

The immediate response of the stock market with the Sensex going up by over 4 per cent within the day is an indication of a turnaround of the investor confidence.

There are areas of concern despite the government's best efforts to revive the economy. It is not merely investor confidence that is holding investment down in the country. It is the lack of good place to invest also. For that, the competitive efficiency of the economy has to be brought back. It is not merely roads and ports, but also the quality and discipline of labour that will be critical for larger investment in the country. It is the ability of the Indian industry to compete globally by making good investment in the right place. Although the government has initiated the process of reforms of the labour and company laws, it is the industry and its resilience that will take the economy to a higher growth plane. The industry waits now for the implications of further removal of quantitative restrictions.

The railway budget has already put some extra burden on coal and steel. The 2 per cent increase in freight in steel and coal and another 3 per cent on a wide variety of bulk products will make things worse for the ailing steel industry. Although the increase has been far less than expected, the timing of this has not been appropriate. The steel industry should be happy to see the import duty rates on its products remaining in tact as there were fears of that coming down this time.

In fact, an increase in import duty on seconds and defectives of HR coils from 25 to 30 per cent is a much needed relief to the industry. The removal of excise duty on steel going for reconstruction of earthquake devastated Gujarat will not mean much to the steel industry in terms of larger steel demand but will help the government and private builders to rebuild the state at lower cost. The steel industry may gain a little from the reduction of import duties for raw materials used in the manufacture of refractories used in the industry. The removal of 10 per surcharge on imports will not however have any significant impact on steel as the critical items like HR coils continue to be covered by floor prices.