Rising fiscal deficit, falling tax collections and slowing industrial growth. What options does the finance minister have to propel growth without compromising on government finances?
Four down, two to go. On February 28, Finance Minister Yashwant Sinha will present his fifth union budget to Parliament. Sinha's earlier budgets had earned the bureaucrat-turned-politician the label of "reformist", with financial newspapers highlighting his persistent efforts to simplify the labyrinth of tax laws and duty structures that exasperated Indians for decades.
This time, however, no one is expecting another round of path-breaking reforms. Expectations are more pragmatic, with most experts believing that the finance minister, caged in as he is by lower tax receipts and a higher fiscal deficit, can do little to activate growth in the economy. "Besides, he still hasn't fulfilled all the promises he made last time," says an economist at a foreign brokerage.
Efforts to follow through on promises to ease labour laws and downsize government slackened after it had to don the role of fire-fighter for most of the year as it struggled to douse the flames of a rash of political and economic scandals.
Indeed, this year, the finance minister will find himself caught in the cross-currents of conflicting goals: the need to spend on infrastructure and to rein in the fiscal deficit (that is, curb expenditure).
The fiscal deficit, a subject of perennial discussion, will come under harsh scrutiny. The fiscal deficit indicates the difference between total expenditure(revenue, capital and loans after repayments) and revenue and capital receipts not in the nature of borrowing.
Economists view it as a key indicator of a country's economic health. The larger the deficit, the greater the concern. That's because around 70 per cent of the deficit is financed by borrowing from the domestic debt market.
Heavy government borrowing from the financial markets can crowd out private investment -- already at an ebb -- and nudge interest rates higher.
There are already glaring signs that the government will exceed its borrowing target. Against a target of Rs 1,18,852 crore for fiscal 2002, the government has dipped into the markets for Rs 1,28,250 crore till date, with economists projecting the final figure to touch Rs 1,40,000 crore. They've pencilled in the fiscal deficit at around five per cent or so of gross domestic product (GDP) -- higher than the government's hoped-for 4.7 per cent.
With a ballooning fiscal deficit, the doors to government spending -- or "pump-priming" as the economists like to call it -- to perk up the economy have practically closed.
It won't help an economy still struggling to haul itself out of a slowdown. GDP growth in fiscal 2001 slowed to four per cent from 6.1 the previous year. This year will also be a disappointment;GDP is estimated to have grown by 5.4 per cent, lower than the targeted level of 6.5 per cent.
The services sector -- which contributes to over 50 per cent of GDP -- has been the engine that kept the economy running for the past two years. But even that has started to show signs of stress.
The industrial sector, too, has witnessed fading fortunes. Evaporating demand has clogged core sectors like cement and steel with a glut in supply. It has also dried up further investment interest.
Overall growth, as reflected in the Index of Industrial Production (IIP), has slowed to a crawl. In the eight months to November, the IIP registered a growth of a mere 0.9 per cent against 6.5 per cent in the same period last year.
But the agricultural sector, which accounts for nearly a quarter of GDP, may be finally reaching out to some glimmers of hope. Enervated by two straight years pockmarked by drought and famine in many parts of the country (the rains while normal, were not evenly spread) this year's normal and well-spread monsoon could lift the pace of growth in this sector.
Good rains remain critical to India's economic health, since agriculture still provides employment to over 70 per cent of India's working population. A good agricultural season could help raise incomes and badly-needed consumer spending. But there are few signs of that happening as yet.
A global slowdown is also doing its bit in casting a shadow on growth. In financial year 2001, even as the domestic economy faltered, exports remained a shining star -- growing at a blistering 20 per cent. It's clear there will be no repeat performance this year. Indeed, exports in the nine months to December have only budged five per cent higher, from the year-ago period.
It can be argued that since India remains overwhelmingly domestic demand-driven, the climb and plunge in export performance should not be a cause for concern. After all, even after a decade after "opening up" the economy, exports make up less than 10 per cent of GDP. Still, some experts say, it does serve to muddy sentiment.
Tensions with Pakistan add another layer to the problems. In the past few days, the financial markets have been spooked by worries that an inclination to increase defence expenditure could leave less wiggle-room for an already cash-strapped government to respond to economic concerns.
With a rather wobbly fiscal situation, the government has prodded monetary policy to provide the spark for growth. That hasn't worked. Over the past 12 months, interest rates have been snipped by 100 basis points. But overcapacity in many sectors has kept investment demand subdued.
The only factors the finance minister can be pleased about is that in the short term, he won't be stalked by the menace of inflation. The wholesale price index (WPI) has slumped to 1.13 per cent -- the lowest in decades, primarily on account of slumping global oil prices. Forex reserves, too, have been a source of cheer, swelling to an all-time high of $49.77 bn.
Against this background, how many rabbits can the 64 year-old finance minister pull out of his Budget hat?
Not too many, perhaps. But there does seem to a consensus about two points: there will be a cut in the small savings rate and a widening of the service tax net.
However, most industry watchers also agree that this may be the last opportunity for the finance minister to undertake any major reforms, because next year he will be in the face of impending elections.
Says chief economist at Bank of America M R Madhavan: " In the coming Budget, the government can afford to initiate some big-time structural reforms and get away with a popular Budget closer to the elections."
Disinvestment: After many years enduring a "stop-go" disinvestment pace, the government seems to have finally firmed up its resolve to speed up divestments.
While IBP's stake sale to public sector IOC cannot technically be called a case of divestment, big-ticket sales like those of VSNL and CMC have inspired confidence in the government's level of seriousness in this matter.
This year, disinvestments proceeds of the government have totalled Rs 5,472.8 crore. Further additions were also made by aggressive dividend policies of state-run companies.
For instance, in the case of VSNL, the government raked in Rs 1,887 crore on account of dividends by VSNL while it received Rs 1,439 crore from its stake sale. Further, the government is compelling some other cash-rich public sector undertakings (PSUs) to declare higher dividends to meet its revenue targets.
Even as marketmen wish that the pace of disinvestment would continue, the big-time disinvestment may happen more by default than design. Today, the fact of the matter is that the government does not have too many options to raise money given the state of the economy.
Apart from reaping the benefits of its earlier investment, the government will also have to find "innovative" ways to increase taxes, say experts. As an economist in a foreign bank puts it: "The budget will be a combination of balancing act, creative accounting and reiteration of past promises."
Clearly, the finance bill will make all possible attempts to widen the tax net. The next step after the "one-by-six" measure will be to extend the tax ambit to areas which have enjoyed a tax-free status or negligible taxes hitherto. Continuing with the tradition, a number of exemptions available both to corporates and individuals may be taken away.
However, given that the government has to harness domestic companies with potential to become world class, exceptions can't be ruled out
