ECONOMY-INDIA: Budget Fudged Say Opposition Leaders

By Ranjit Devraj Reprint | | Print |

Ranjit Devraj

NEW DELHI, Feb 28 1999 (IPS) - Accusing Finance Minister Yashwant Sinha of fudging the fiscal deficit figures, Opposition leaders have called for resistance to his ‘pro-rich, pro-reform’ annual budget proposals, presented in Parliament, Saturday.

Sinha’s immediate predecessor in office, P. Chidambaram said he found a patent lack of transparency in the budget ‘disturbing,’ especially in the grossly understated expenditure estimated at 71 billion dollars.

“Non-plan capital expenditure of 6.2 billion dollars involving transfer of small savings from the public account to the states has been hidden in a footnote,” Chidamabaram complained.

Sinha’s budget pegged the fiscal deficit at 20 billion dollars or 6.5 percent of GDP which is way beyond the 5.6 percent he projected it would be, last year. “The true estimate of fiscal deficit would be 5.6 percent and it can only go up by the end of the year,” Chidambaram said.

Early last year, the World Bank and the International Monetary Fund (IMF) issued warnings that the deficit figures were unsustainably high and when Sinha ignored it, rating agencies Moody’s downgraded India to junk bond status.

There then followed an exodus of foreign exchange and by the end of October, net foreign exchange investment excluding direct investment had declined by 2.4 billion dollars. Non-resident Indians (NRIs), a favoured category, pulled out another 900 million dollars.

“The fiscal and revenue deficits of both centre and state are still too high and are undermining our ability to bring down interest rates, stimulate investment and growth, curb inflationary potential, generate resources and raise exports,” Sinha said in his budget speech.

Sinha’s efforts to reduce deficit are based on two unpopular measures – a 2.5 cent (U.S) hike in import duty on diesel and hikes in direct and indirect taxes which will hit the salaried middle class. He has also imposed a ten percent surcharge on customs duty.

The Telugu Desam Party (TDP) which rules southern Andhra Pradesh state and is an important constituent of the Bharatiya Janata Party (BJP)-led ruling coalition has already demanded a roll back of the diesel price hike.

According to Biplab Dasgupta, economic analyst for the Communist Party of India (CPI) and member of Parliament, the hike in diesel prices will hit the transport sector and farmers who use tractors and run diesel pump sets.

Given that India consumes around 60 billion litres of diesel annually, the hike in duties should fetch 1.5 billion dollars. But Dasgupta said it was bound to have a “cascading effect,” on an inflation-prone economy.

A separate budget presented Thursday for India’s massive Railway system raised freight charges by four percent which is expected to hit the movement of a variety of industrial goods and raw material such as coal, steel, cement and agricultural products such as wheat, rice and cotton.

Sinha has pulled out stops on foreign investment offering NRIs 100 percent automatic approval and 75 percent automatic approval for foreign direct investment (FDI) – a move which defies the the protectionism advocated by hardliners in the BJP.

Opposition to the move, which follows reforms India has been committed to since 1991, also comes from the communist parties which predict an “accelerated transfer of Indian productive assets to non-residents.”

“The incentives offered to foreign and NRI investment are designed to encourage the use of the financial route to capital market investment, mergers and acquisitions rather than increase investment involving expansion of actual productive capacity,” the CPI-M commentary said.

On the other hand, Ruchir Sharma, a spokesman for international financial consultants, Morgan Stanley, said there is nothing in the budget to suggest that India is serious about reforms or in boosting investor confidence.

Said Manmohan Singh, the man widely regarded as the architect of India’s reforms during a stint as finance minister between 1991 and 1996, “the budget is far from stimulating the targeted seven percent growth rate.”

Singh, now a top ranking leader of the Opposition Congress party, said he detected no coherent policy or economic approach but a lot of intellectual dishonesty in Sinha’s budgetary speech.

Singh summed up Sinha’s predicament as one of trying to tell foreigners that customs duty has been reduced and telling the nationalist lobby within his party that he has slapped a surcharge on customs duty.

Sinha still hopes to gain 2.5 billion dollars through sale of shares in public sector units although last year he ended up forcing cross-purchases of equity among the more profitable units to collect USD 1.9 billion dollars – a move criticised as a pre- budget fudge on the deficit.

The budget has pleased domestic business and industry and caused a five percent jump in the sensex. “This budget signals the beginning of the second phase of India’s reforms,” said Tarun Das, President of the Confederation of Indian Industries (CII).

But communist leader, A B Bardhan saw the cheer among industrialists as a sure sign that once again the poor were being made to “pay the price of profligacy through budgetary manipulation.”

Bardhan was particularly critical of the budget’s failure to address the problem of curbing a large parallel economy which is estimated to generate 2.5 billion dollars of unaccounted money each year. “This works as a subsidy to the rich,” he said.

An apparently major initiative towards rural empowerment is the involvement of village local bodies or panchayats in their own development covering such grossly neglected areas as health care and irrigation.

Ongoing schemes for development of degraded and waste lands are to be re-oriented to let local and self-help groups develop them in 200 districtsunder a new National Movement for Watershed Development.

The scheme was however criticised by Dasgupta as spurious because of the low budgetary allocation of 12 million dollars “Besides, in villages which really need help, panchayats are inoperative,” he said.

Sinha’s budget also does lip service to suggestions by Nobel Prize winner Amartya Sen calling for massive investment in human development beginning with primary education. Half of India’s billion odd people are illiterate.

A National Education Guarantee Scheme is now to be launched for elementary schools in every habitation where a school does not exist within a radius one km. The catch is that there is no new allocation for the scheme.

Said Mohan Guruswamy, sacked recently as advisor to the Finance Minister for being too outspoken, “I had hoped that there would be an allocation of about 400 million dollars for building new schools and improving existing ones.”