Sanctions, slowdown cloud Sinha8217;s budget

While industry expects reliefs in the form of increasedcustoms duties for protection against cheap imports, the foreign insurance companies pin high hopes of further liberalisation of financial services sector to open up possibilities of joint ventures, particularly in health insurance. They also expect the Insurance Regulatory Authority IRA bill to be introduced.

Sinha has hinted at a tough budget as it was going to be an quot;onerous taskquot; to reconcile conflicting objectives in the budget. This has become more pronounced after the wide-ranging sanctions. The impact of sanctions on the economy could be upto 1.5 billion in a full year and budget might have to make provisions for it.

Amidst conflicting political compulsions and fiscal pressures, Sinha will unveil his economic agenda to take the country to the 7 to 8 per cent growth path with overall fiscal deficit not exceeding 5.5 per cent of the GDP. During 1997-98, the GDP growth rate slipped to 5.0 per cent from 7.5 per cent in the previous year and fiscal deficit shot up to 6.1 from 5.2 per cent.

Thechallenge before the minister is to put the economy back on rails, arrest slowdown in industrial production and exports and ensure stable value of currency through appropriate fiscal and non-fiscal measures. The primary task would be to reverse any possible deterioration in economic situation following a sharp deceleration in the growth rate to 5 per cent in 1997-98 coupled with poor industrial and export growth.

This is also essential to counter the economic sanctions.

As far as the state of economy is concerned, the index of industrial production IIP during 1997-98 was down to 4.2 per cent and exports dipped to 2.6 per cent. The capital goods sector registered a negative growth rate of - 4.0. Unfortunately, the options before the minister to give a real push to the economy without either sacrificing fiscal prudence or populism are extremely limited.

In the interim budget prepared at the existing levels of taxation, the fiscal deficit worked out to be 6 per cent for 1998-99. Sinha has alreadyhinted that he was against excessively compressing the fiscal deficit for the sake of it, but he would have to settle at a point somewhere between 5 to 5.5 per cent of the GDP.

The option would be to either compress expenditure or raise more resources through additional taxation. Also drying up of a part of foreign grants and loans would increase the pressure on the finance ministry to look for more funds.

As far as curbing expenditure is concerned, it will be impossible for the finance minister to reduce non-Plan expenditure. On the other hand he will have to shell out more for the defence sector.

With regard to direct taxes, a fourth slab for super rich may find a place in the Finance Bill. Also as has been done by finance ministers in the past, Sinha too may impose a surcharge on corporation tax. As far as rates for personal income tax and corporation tax are concerned, there is no possibility of increasing them. Slabs, however, may be readjusted to counter inflation.

In case of indirect taxes,there is a possibility of readjusting the customs tariff within the parameters of the World Trade Organisation WTO commitments. Although the Economic Survey advised against increase in duties, the step is still a possibility to achieve the twin objectives of protecting the domestic industry and raising revenue. On the excise front, there is not much which Sinha can do without hurting the industry struggling to come out of the recessionary phase.

As far as non-fiscal aspect of the budget is concerned, what is no more or less is certain is that the finance minister will come out with a paragraph on the insurance sector. As the Insurance Regulatory Authority bill does not form a part of the agenda of the government for the budget session, all those waiting in wings for entering this lucrative sector will have to take comfort from some announcements in the budget speech of Sinha.