Business
The changing budgetary backdrop
By S. Swaminathan
There is much less scope for speculation on Yashwant Sinha's fifth successive budget than was the case for his previous exercises. The main reason is, of course, the paramount need to address the imperative of economic revival through stimulation of demand and public investment. That the accent of public expenditure has to be on agriculture and rural development for reinvigorating demand for a broad range of consumer goods is self-evident even if there is considerable scepticism about the delivery mechanism in the rural areas in the absence of effective administrative and financial devolution at the grassroots level. Even if Mr. Sinha (and the hard core of his economic advisers both from overseas and from within the country) tends to sound notes of caution about containing the level of the fiscal deficit, that issue seems to have become a subordinate criterion in budget formulation when put alongside the need for overall economic reactivisation. Given an unprecedented low and stable rate of inflation (with pronounced excess capacity in wide segments of the economy), the temptation to opt for an expansionist fiscal and monetary policy appears to be hard to resist.
Mr. Sinha's budget, in the circumstances, can be expected to involve larger outlays on infrastructure including the social sectors whether or not it seeks to mobilise tax revenues in any aggressive fashion, apart from spreading the tax net to reach out to the service sector. Considering Mr. Sinha's repeated emphasis on the lowering of the customs tariffs to the East Asian levels, it would indeed be surprising if he would permit giveaways in direct taxes, as for instance, through the scrapping of the minimum alternative tax (MAT) as demanded by chambers of industry. Some tokenism with regard to exemption limit and standard deduction on income tax is perhaps on the anvil.
Comparative economic environment
The consensus among analysts is that the economic trends so far during 2001-02 have been distinctly unfavourable when compared to 2000-01, with the implication that the forthcoming budget will be much more dilemma-ridden and daunting than the budget for 2001-02 which was misperceived by India Inc. as the "best fit'' for economic rejuvenation while it actually turned out to be a non-starter in many respects. The fact that the year was marred by a slowdown in the U.S. (with its negative impact on India's exports) and later by the terrorist outrage in September on the U.S. was perhaps not so decisive a cause as the conspicuous failure of coordination and implementation at the level of the Central and State governments.
The macro-economic conjuncture revealed by the indicators in the accompanying Table is compounded by two broad factors. The first is the deceleration in the growth process, particularly marked in the case of industry. That the industrial slowdown has been caused mainly by the slackening of aggregate demand (rather than by import competition) is now being generally recognised. The second factor which stands out in the economy is that the external sector is in a robust state notwithstanding the slump in exports. The other positive factors in the economy are the extraordinary low rate of inflation, the firm rate of exchange and the comfortable level of foreign exchange reserves.
It is difficult to subscribe to the view that the next budget will necessarily be constrained in terms of its manoeuvrability to trigger a process of economic revival except in the sense that the Government's resources position (both of the Centre and of the States) is extremely tight. The problem of fiscal management will not be so much of larger magnitude of public expenditure as it will be one of prudent prioritisation and allocation.
Given a comfortable situation with respect to food stocks, liquidity with the banks, the forex reserves and excess capacity in industry, the task of formulating the budget ought not to prove too formidable. But then, if the Finance Minister attempts to reach out to all the constituents at the same time (farmers, industry, the middle class, foreign investors, and so forth) he could end up with a "mish-mash'' of a budget, perhaps a catalogue of announcements without a clarity of perspective much less a design for government action.
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