North Block nostrums

Yashwant Sinha8217;s budget for the last year of the century sounds like the temporary return of sobriety after a long spending and borrowing binge. It has the marks of the morning-after. Good resolutions have been made but are blurred by doubts about whether they will be carried all the way through. The acute discomfort caused by an unconscionably high fiscal deficit 6.5 per cent of GDP in 1998-99 has led to brave promises to reform government finances over the medium term. At the moment, downsizing of government consists only of abolishing the posts of four secretaries. Any fear of top jobs actually being lost will be immediately set at rest by the number of proposals in the budget for new committees and commissions including one on expenditure reforms. More bouts of spending in 1999-2000 have been eschewed for the time being. Proposed non-Plan expenditure is lower than in the current year and the provision for productive Plan expenditure is up. Even though such commitments are made to be broken, at least theintention is sound. A partial remedy for the intractable fiscal headache is sought in surcharges on corporate and personal taxes and customs duty and a doubling of the disinvestment target to Rs 10,000 crore. The surcharges set fiscal reform a few steps back and still leave a high fiscal deficit and the prospect of a high level of government borrowings and pressures on interest rates and the price line. After the unsuccessful fiscal strategy of the last year, the finance minister has been wise not to place his hopes again on an early economic recovery. But settling instead for an unambitious holding operation is not good enough. He has to get tougher and drive expenditure down in 1999-2000.

The cap on spending has led to efforts to improve the delivery mechanism for anti-poverty and social programmes. This has been long overdue. One of the most welcome is the transfer of resources directly to panchayats which will be responsible for expanding primary health services and primary education and projects undera new unified rural employment scheme. At the very least, the diversion of funds and waste will be reduced. Agriculture is to be supported by improved access to credit, by a watershed development fund and central assistance to states carrying out further land reforms. Rural industries are getting attention. These are necessary, useful and low-cost initiatives.

There are no major stimulants to industrial growth. The exceptions are the small-scale sector and 8220;sunrise8221; industries like information technology where more incentives have been announced. Steel and cement will benefit after a lag from the boost to road building and housing construction projects as a result of the cess on high speed diesel and tax incentives for the middle classes. The major change in indirect taxes is the reduction in the number of excise duty rates to three and custom duty rates to five. The impact of excise changes will be marginal. The uniform 10 per cent surcharge on custom duties is bewildering and harsh. As the economicsurvey points out, high customs duties have had the effect of protecting inefficient operations. This sledgehammer approach to raising revenues will do no one but the swadeshi lobby any good. After another year of slow growth, industry which is slapped with a four per cent hike in railway freight charges, a one rupee cess on diesel and a 10 per cent surcharge on corporate taxes has only a national award on corporate governance to look forward to.

Tax exemptions on income from UTI and equity-based mutual funds, and the reduction of long term capital gains tax to 10 per cent are the sum total of the package of measures to revive the stock market. These and plans on the anvil to reform UTI may improve the confidence of investors in the mother of all mutual funds. Many other things are necessary to sweeten and sustain market sentiment. Among them are what the government delicately refers to as 8220;extra-economic factors8221;, meaning political stability. Corporate performance after the new knocks delivered in thebudget will be watched closely as will signs of recovery in the global economy.

Extra-budgetary measures may reveal the full picture for the external sector and for industry. For the moment the one new initiative is income tax-free, capital gains tax-free gold bonds the purpose of which is to stem the outflow of thousands of crores of foreign exchange. No amnesties in this scheme, thankfully. After the old assurances on a hassle-free environment for FDI comes another bureaucratic creation. Is the Foreign Investment Implementation Authority going to be better than the PMO at cracking the whip on dilatory ministries? Or is it a vehicle for new jobs for bureaucrats?