Editorial 1 / Alpha for the attempt
Mr Sinha gets a high Second
Taxiing on the reform runway
Letters to the editor

 
 
EDITORIAL 1 / ALPHA FOR THE ATTEMPT 
 
 
 
 
There were reasons for scepticism. Last year’s budget did not augur well, nor did the railway budget. Elections are due in several states and populist pressure exists from the National Democratic Alliance allies. To cap this, several key officials in the department of economic affairs and the finance ministry changed while the budget was under preparation. On the flip side, the report of the prime minister’s economic advisory council and the Economic Survey carried a strong reform message. However, there is little correlation between what the Economic Survey argues and the budget. The Economic Survey argued that growth rather than inflation was the problem. It is impossible to disagree with the Economic Survey that core inflation, after netting out energy price hikes, is under control at around four per cent and the key issue is one of restoring growth stimulus and the feel-good factor. Although there are questions about Mr Yashwant Sinha’s proposals being implemented, the fact that the budget pushes growth through reforms needs to be applauded.

Talk about a harsh budget was interpreted as continuation of surcharges on direct taxes and customs and a possible increase in the service tax rate. The customs surcharge has gone. Other than this, with the exception of information technology and gold, there is no evidence of decline in customs duties. There is instead, some hike in duties on agro products and protection promised for automobiles and liquor and levy of countervailing duties on maximum retail price. However, Mr Sinha has also promised 20 per cent duties in three years. On excise, there is the expected rat-ionalization to a central rate of 16 per cent. Consequently, there will be the inevitable complaint that in relative terms, consumption of the poor is taxed more and that of the rich (cars and two-wheelers) taxed less.

The finance minister has withdrawn direct tax surcharges, barring the Gujarat one. Although there is some widening of service tax and tax deduction at source, the service tax rate has not been hiked. There is, therefore, no reason to call this budget harsh, except for reduction in interest rates on small savings. However, tax concessions on these have not been eliminated and there is no rationale in guaranteeing such high rates of return on small savings, when inflation has dropped significantly. While these changes that impact directly on the government’s receipts and expenditure are important, the indirect reforms proposed are even more significant, provided there is no rollback under pressure from allies. Examples are the review of the Essential Commodities Act, corporatization of major ports, Food Corporation of India procurement only for buffer stocks and not for the public distribution system, decontrol of petroleum, fertilizers and drugs, and user charges for government ut- ilities. While some will be stymied and stalled, increase in foreign institutio- nal investment cap to 49 per cent and automatic appro- val for foreign direct investment in non-banking finance companies is likely to pass, as will repeal of the Sick Industries Companies Act and introduction of a national company law tribunal.

The significance of the budget is not in what it directly spends on agriculture, infrastructure or education and there is justifiable scepticism about Centrally sponsored schemes that never deliver. In fact, Mr Sinha proposes zero-based budgeting for such schemes and handing them over to states. Instead, the indirect stimulus to infrastructure and agriculture are likely to be more significant. There will certainly be questions about implementation, since downsizing government is difficult to swallow with such a jumbo-sized government. There will also be scepticism about the disinvestment target of Rs 12,000 crore. This is where the political economy of selling reforms comes in, what with allies and a Congress that has now turned its back on reforms. However, given the constraints, Mr Sinha deserves high marks for trying, which is more than could be said for him last year.

   

 
 
MR SINHA GETS A HIGH SECOND 
 
 
BY SHUBHASHIS GANGOPADHYAY
 
 
When P. Chidambaram presented his “dream budget” (1997), my colleague and I had predicted a high growth rate for the economy. So had many others, but later faced a serious dilemma when the government growth figures started being revised down, then up, then down and so on. Today, after the figures have stabilized, we know that that budget was, indeed, followed by a good growth year. A similar thing can be said about this budget, though with a caveat. Some of the very best things in the budget will require not only the support of all the coalition partners of the National Democratic Alliance, they will also need the active cooperation of the state governments.

First, let us consider the amendments to the labour laws that have been proposed. Earlier, all units employing 100 or more people could not retrench labour without asking for court permission. Now this floor has been raised to 1,000 or more workers. This has been balanced by an increase in the severance package — workers must now be compensated for 45 days for every year of completed service, rather than 15 days as before. When the finance minister, Yashwant Sinha, was reading out this section of the budget, one could hear noises from many quarters in Parliament. I am afraid these noises will continue to be made in the days to come. Mamata Banerjee, after her performance with the railway budget, is expected to oppose this. So will, I presume, the Left Front in West Bengal and, may be, even the Telugu Desam Party in Andhra Pradesh.

Sinha and the prime minister will have to use their political skills to implement this proposal. They will have to point to the fact that continuing with loss-making units does not protect labour, moving them to profit-making ones does. Loss-making units may not be closed down, but their labour seldom get paid. Growth of productive employment has slowed down in West Bengal and this does not benefit labour. The government must show commitment to protect labour during rehabilitation of loss-making units, but through a proper formula for severance pay, rather than the current fraud of trying to continue operation in loss-making units. I hope that compromises are reached in the amount of severance pay rather than through a scrapping of the proposed changes in the labour law. Similarly, proper safety nets must be constructed before the proposed contract labour law amendments are implemented.

As someone keeps pointing out on all possible occasions, we have sick units and unpaid labour, but no sick entrepreneurs. Sinha and his advisors seem to have finally become aware of this, for they have also talked about stringent loan recovery laws in the case of default. This will force managements to be more efficient. As things stand, they have an incentive to make their units sick and strip down assets while the board for industrial and financial reconstruction mulls over what to do for years on end. Thus the Sick Industries Companies Act must go and Sinha has hinted at that. If political parties oppose this move, they will be defrauding the labourers.

Another major move in the budget is the proposed freeing up of the foodgrain trade. Agriculture is a state subject and so the finance minister requires all the help that he can get from the state governments. The latter must also cooperate with him for the reforms in the power sector. The state electricity boards are a mess — politicized, inefficient and bankrupt. While the minister has wielded the stick of Central assistance only if there is progress in state-level reforms, he must also demonstrate enough credibility to use it. Regional coalition partners of the NDA should not be allowed to hold him to ransom and must implement the power sector reforms. On the other hand, should a Congress state government implement them, it should be rewarded.

What are the proposals where the finance minister is expected to be free from pressures of regional parties? One immediate thing that comes to mind is the reduction in government posts. He has committed to downsize the number of secretaries and other junior positions, starting with his own ministry. One hopes that these are not substituted by officers on special duty or by special advisers, or by experts drawn from various committees. While it is good to start with his own ministry, he must not become defensive when it comes to other ministries. A good idea will be to completely abolish the railways ministry, for instance, as well as those of civil aviation, surface transport, telecommunications and so on. Once things are being privatized, what is the purpose of such things? If we do not get rid of these people now, very soon they will start spending their time channel-surfing on television to search for titillating advertisements, as is currently being done by a particular minister.

While unnecessary ministries and departments must be downsized, the government must redeploy resources where they are needed. There should be more government involvement in education, health, public infrastructure, governance and so on. In India, we have a peculiar situation where the government is all pervasive in the private domain and totally absent in the public domain. The finance minister has made the right noises on this front — what remains to be seen is how much of it is actually implemented.

There is very little to complain about the tax proposals, other than the fact that in some cases where the quotas will go, the tariffs have been fixed at ridiculously high levels. The removal of the surcharge on income is a good thing, though there is not much talk on broadening the tax base. The rationalization of excise duties has progressed, even though the duties on some items have been increased because of this. Edible oils may increase in price, and cigarettes should become more costly. Cars will be cheaper, but it is not clear whether that is a good thing at a time when there is so much talk about pollution. However, it should benefit the automobile industry, which has strong backward and forward linkages that can generate productive employment.

In fact, this is a budget which should be passed in Parliament. Unless one is stubbornly ideological and/or totally elitist, it is difficult to continue with what we have been doing so long. Sinha has been rational and honest in acknowledging this. He now has to muster all his acumen and skill to see it through. It will be a sad day for all Indians if the rail budget is passed and the Union budget is held up by petty ideological squabbles. We have been knocking on the doors of a high growth economy for a very long time. The time has now come to walk through that door.

The author is an economist at the Indian Statistical Institute, New Delhi    


 
 
TAXIING ON THE REFORM RUNWAY 
 
 
BY S. VENKITARAMANAN
 
 
A difficult job well done. Yashwant Sinha’s budget for 2001-02 shows signs of pragmatism and a clear commitment to reforms. Overall, the finance minister has addressed all the important issues which confront the economy, but within his constraints. His principal focus has rightly been the management of fiscal deficit. He has taken pains to explain, during the budget speech, why it is important to reduce the fiscal deficit as it leads to debt pressure and ultimately to a debt trap.

It is creditable that Sinha has managed to keep the fiscal deficit in the revised estimates at the same level (5.1 per cent) of the gross domestic product as in the budget estimates. It is true that this has been, in part, made possible because of the reduction of defence revenue expenditure over the budget. He has mentioned in his speech that he has made a start by effecting economies in staff expenditure, particularly by cutting down posts in his own department. This means that he has taken seriously the task of downsizing the government.

The budget speech rightly focuses attention on the importance of reviving agriculture in general and the rural infrastructure sector in particular. Substantial additional provisions to rural infrastructure have been indicated. The seriousness of the finance minister in achieving his target is also evinced by his promise to place in the house a statement showing the accomplishments against the targets set in the budget. The emphasis on adequate and quality storage for foodgrains and on removal of outmoded restrictions on the movement of agricul- tural products by amending the Essen- tial Commodities Act are a sign of things to come.

More than the provisions in the budget for expenditure, it is the general direction which deserves to be commended. The finance minister has indicated his general feeling that the economy should be liberated from the age-old restrictions and reservations. The move to amend the Essential Commodities Act is, therefore, a step in the right direction.

There are also other indications of reform orientation in the acceptance of the recommendations of the expenditure reforms commission with regard to urea-pricing and the recommendations of the prime minister’s economic advisory council with regard to food procurement. But, this is not, by itself, enough to stem the flood of subsidies in the food sector. It is necessary to reverse the trend of procurement prices being determined on an ad hoc and populist basis.

The finance minister’s proposals have been basically governed by a desire to restructure the tax structure in order to make the tax net broad-based and taxes easy of compliance. He has also kept in mind market expectations. The market has rightly welcomed his decision to reduce the dividend tax to 10 per cent. Equally welcome has been his decision to reduce the surcharge.

The burden of tax effort has essentially come on the excise revenue, where in the name of rationalization he has raised the effective rates of tax. He has also chosen to levy relatively high customs duty on agricultural imports, particularly edible oil and copra. His decision to charge high duty on imported second-hand vehicles will be welcomed by the Indian automobile industry. The general structure of customs and excise duties is industry-friendly, especially in the context of the removal of quantitative restrictions. The finance minister has been true to his word in seeing to it that the Indian industry does not suffer from the impact of liberalization. To what extent his proposed duty structure will stand World Trade Organization scrutiny is a matter to be considered. I am sure that he has taken expert opinion before formulating his budget.

The impact of the recommendations of the prime minister’s economic advisory council is clear in various aspects of the budget. The finance minister has rightly reduced the rate of interest on small savings by 1.5 percentage points and won state governments’ acceptance by his promise to give the benefit of such reduction on loans to which the states are eligible from out of small savings.

Particularly worth mentioning is his decision to reduce import duties on gold. It is to be hoped that this will reduce smuggling of the yellow metal. But there is no easy solution to this problem posed by the glamour of gold in India, unless there are alternative saving instruments which can be held safely. Sinha will need to revisit the various suggestions already made regarding gold bonds to be issued either by the governments or by the State Bank of India.

The finance minister has also taken seriously the economic advisory council’s opinion with regard to the liberalization of labour laws. He has promised to make necessary changes on the contract labour statute to realize the council’s intentions. This is obviously not going to be an easy task. The trade union interests will try their best to delay the implementation of his promise.

Sinha has rightly emphasised the importance of user charges in enabling larger investments in infrastructure. He has particularly emphasised the need for levying appropriate tariff in the power sector. He has promised additional funds to those states which implement reforms. One hopes that he will succeed in this attempt.

With regard to disinvestment, the finance minister has taken credit for Rs 12,000 crore in the budget. This seems unrealistically high, especially when we consider that in the revised estimate for 2000-01, he has not even realized Rs 2,500 crore out of an estimate of Rs 10,000 crore. The latest controversy regarding Bharat Aluminium Company, however unjustified, does not create confidence that the finance minister’s estimate in this regard will be realized.

Sinha has also announced a number of steps towards making Indian entities’ investments abroad easier. This will particularly help the information technology sector. While there is no indication of the move towards capital account convertibility, he has done his best to make for a level playing field between Indian businessmen and those located abroad. At the same time, he has opened the door for foreign direct investment in the financial sector by enabling the FDIs in non-banking finance companies through the automatic route. Detailed regulations in this regard will, no doubt, be issued by the Reserve Bank of India.

Overall, the budget is one which strengthens confidence that the Indian polity can stay out of unsustainable debt and take harsh decisions to liberate the economy from the decade-old regime of controls. One may differ on details of tax reforms introduced by the finance minister; but, in general, his direction is right, particularly his focus on reduction of fiscal deficit and implementation of the second generation of reforms.

 

The author is former governor, Reserve Bank of India 


 
 
LETTERS TO THE EDITOR 
 
 
 
 

Old fantasies die hard

Sir — Mukul Kesavan is slightly wrong in some of his assumptions (“Hedonism in adversity”, Feb 25). His “death of innocence” denies the continuing life of the middle class fantasy, albeit in variant forms. Kesavan somehow does not understand that the objects he has pinpointed with such panache, namely, “Dutch tulips... [and]...fancy telephone instruments”, are so strongly embedded in the collective consciousness of the Indian middle class that we still have cinema on the same lines. His elegiac tone about films for a middle class audience is unaccepting of the fact that Indians today continue to be caught up with anything “foreign”. And this is not limited to the middle-class alone. The MTV generation, which is certainly more outlandish than cosmopolitan, is to Indians of most classes necessarily “foreign”. Finally, he could have also discussed a relatively recent commercial film like Roja. Its locales were equally “hill station-esque”, the music very popular, but it got a tax-free status. How does one explain this phenomenon? What could possibly have triggered this blurring of lines?
Yours faithfully,
Abhijit Gomes, Calcutta

Our smut brigade

Sir — Sushma Swaraj seems to have started running her information and broadcasting ministry the same way that Indira Gandhi ran the country a few decades ago — like a dictator. It appears that acting the policeman is an unwritten code of conduct for the Bharatiya Janata Party government. Swaraj probably finds playing superintendent of cultural police the best way to score with her bigoted party bosses and ensure an easy ascent of the political ladder.

When Swaraj accuses FTV of “hurting Indian sensibilities” (“FTV sheds lingerie for swadeshi colours”, Feb 21), she should remember that her government has done that more grossly on more than one occasion — the lack of foresight in crisis management before the Gujarat earthquake and the mismanagement thereafter being a glaring example. In any case, those who watch FTV for what she says they do, need not stop with FTV to satisfy their desires; the internet will suffice for that. For the time being, she has got the director-general of the channel to play to her tunes, and that should satisfy her. She can at least claim that she has proved her point to herself and to her bosses, if not to her countrymen in general.

Yours faithfully,
Santanu Ganguly, Calcutta

Sir — Since the past few weeks, a single television channel, FTV, has been talked about threadbare in the Indian media. Are the citizens of this country — who, the government thinks, are “sensible” enough to vote them to power — not “sensible” enough to know what they want?

The biggest democracy in the world is being ruled by the self-proclaimed moral and culture police of the country — the information and broadcasting ministry and the censor board. Far more explicit materials are freely and easily available across the country, right from a small village in rural India to the big cities. Censorship laws have to be changed. It’s best if we start now. Censoring one channel is a short term and illogical solution.

Yours faithfully,
Tejash Doshi, via email

Sir — The obscenities flashed on private channels is the biggest corruptor of the Indian youth. The FTV leads the crusade in this matter. A Russian channel, TB6, broadcast similar programmes but fortunately, was banned by the then minister for information and broadcasting, Arun Jaitley.

It is strange that despite his fulminations against the Valentine’s Day for trying to import a foreign culture into the country, the Shiv Sena chief, Bal Thackeray, has not recommended a ban on FTV, which promoted pornography as shamelessly. The channel should be banned forthwith.

Yours faithfully,
S. Jamal Ahmad, Patna

Ports of chaos

Sir — While standing in the queue for security check before boarding the Royal Brunei flight to Dubai on February 14 at the Netaji Subhas International Airport, Calcutta, I was shocked to see the way the security personnel made an ugly attempt to almost snatch some money from the person undergoing the checking. There was also complete mismanagement in the queue for X-ray checking of luggage.

Some airport employees are making an effort to extort money from gullible passengers by rendering services which otherwise should be done free of charge. This is in sharp contrast to the astonishingly efficient services obtained at a vast and busy airport like that in Dubai.

Yours faithfully,
Ranjit Kumar Guha Roy, Dubai

Sir — As a foreign tourist visiting Calcutta for the first time, I was struck by the regulations at the city’s international airport. I was prevented from accompanying my friend, who was leaving for Bangkok, into the airport. I was told to buy an entry ticket for the sum of Rs 50. However, even that could not allow me more than a mere 30 feet inside the premises. In no other airport in the world does one have to buy an entry ticket to enter the terminal building. Nor do I know of airports where one cannot return to the main hall after checking in, usually one is barred from returning only after the passport checks. If the airport authorities feel this particular setup is necessary, then they should at least inform the visitors before they buy the entry ticket, warning them that it only allows them an extra 30 feet into the building.

Yours faithfully,
Hessel van den Berg, Amsterdam

Annual anxieties

Sir — It is several months since devastating floods paralysed life and communication and destroyed property, mainly of the poor, in West Bengal. In another few months time the monsoon will set in. Till date, very little work has been carried out or minimal action taken, to rehabilitate various dam reservoirs to hold water and to prevent them from discharging the water during a slightest bit of heavy rain. Nor have there been efforts to desilt canals and drainage channels so that they can receive excess rain water from agricultural fields and habitats and they do not form a barrier to the natural flow.

It serves the citizens of West Bengal no purpose for the authorities to form endless committees and study multiple reports year after year. The causes of yearly floods should have been enquired into, responsibilities for lapses, if any, fixed, action taken and the entire operation discussed threadbare in the assembly than to fight over a remark made by the head of the state.

Representatives elected with tax payers’ money appear to be either ignorant of the miseries of the people or they deliberately sidetrack the main issues by discussing irrelevant matters.

Yours faithfully,
Bachaspati Goswami, via email

Sir —After the ferocious flood last year, it was announced by the administration that the almost dead Ichhamati will be revitalized. But the river seems to have become more fierce. The people of Bongaon and Basirhat are frightened of being marooned again. The state government should look into the matter immediately.

Yours faithfully
Tamal Banerjee, via email

Smoke signals

Sir — The news report, “Bill battles tobacco terror” (Feb 7) made for interesting reading. The tobacco terror needs to be wiped out at once by passing this bill in the two houses of Parliament. The threat of cancer is a very potent one. Millions of youngsters make themselves vulnerable to this threat by becoming smokers very early on. This has to be stopped.
Yours faithfully,
T.R. Anand, Calcutta

Sir — How many people smoke cigarettes? The answer would certainly have to be in millions. This only goes to show that a vast majority is in favour of smoking. Keeping this in mind, it will not be very sensible to enforce laws which go against the wishes of most people.

Everyone knows of the harmful effects that smoking can have on addicts (cancer, asthma, cardiac problems and so on). But ultimately, do smokers genuinely fear these diseases? Are people really concerned about the vulnerability of other people’s passive smoking? Today, smoking is too much of a fashion statement for people to relinquish it easily. Besides, many also smoke because they believe that it relieves their stress levels.

Moreover, if the banning of tobacco advertisements and the ban on smoking in public places are actually introduced, this will mean a big blow to a very large Indian industry. This will also have to be kept in mind.

Yours faithfully,
Diptimoy Ghosh, Calcutta

Sir — It is not clear why there is such a big hullabaloo about the banning of smoking in public places. Surely, there is an immense danger from the use of substances like gutkha, snuff, khaini and so on which are equally harmful. It is well-known that the law about the use of these substances is nebulous.

These things are openly sold and consumed. What about this dimension to the problem? There should also be similar bans issued against liquor, which is not benign by any stretch of the imagination.

Yours faithfully,
S. Ahmad, via email

Sir — The tobacco ban bill is myopic. This is not to brush under the carpet the damage done by smoking to both smokers and non-smokers. If the bill is implemented it may result in some good for both smokers and non-smokers but it will have disastrous effects on our economy. The manufacturing companies will have to cut down on production, thereby earning less money.

This might lead to retrenchment of staff, and that, in turn, will feed into the unemployment problem. Advertising agencies would go into the red. The government would lose thousands of crores in revenue. Sports will suffer because of the absence of patronage by the tobacco companies. All of these things go against the argument for the imposition of the tobacco ban.

Yours faithfully,
Sush Kocher, Calcutta

Above devastation

Sir — The devastating earthquake in Gujarat has called for an all-round support in cash and kind from every possible source. The focus is once again on imposing further tax burdens which will ultimately have to be shouldered by the common man. Even the well-paid government employees have been asked to donate a day’s salary towards the prime minister’s relief fund. There are also numerous non-governmental and voluntary organizations which have plunged into the relief operations.

But sadly enough, one does not hear of such commitment and generosity being extended by the politicians and leaders themselves. Some routine aerial visits have been made by them; but apart from that nothing has been done. After all, during the Boer War, M. K. Gandhi himself took active part in relief operations. It is time these leaders stopped paying only lip service and started to offer, real help.

Yours faithfully,
G. Sahay, Kodarma

Sir — Earthquakes are mentioned in the Vedas, Puranas and the Mahabharata. This should be the starting point for researchers and seismologists. Unfortunately, researchers all over the world ignore ancient texts which provide us with accurate information about natural phenomena. For instance, the Mahabharata mentions the disappearance of the river, Saraswati. Pakistani archaeologists have actually discovered the dried-up river bed of the Saraswati. But many Hindus continue to believe that the river still flows at some subterranean level. A progressive attitude to knowledge must replace superstitiousness.

Yours faithfully,
Radha Kanta Seth,Kamlibazar

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